A view of the insurance business from a veteran’s eye  

May 28, 2010

 Fali Poncha’s views on the insurance industry and how insurance shapes your world

On Saturday, 22nd May, Moneylife Foundation witnessed Mr Fali A Poncha, a veteran of the insurance industry, speaking about the various topics and issues relating to the insurance sector. Mr Poncha, who has been in the insurance industry both pre- and post-nationalisation, was also a director and special advisor at Tata Risk Management Services for nearly 15 years and is currently executive chairman, International Reinsurance and Insurance Consultancy & Broking Services Ltd. He spoke to an interactive audience regarding consumer issues and the insurance industry as a whole. He expressed his view on a number of topics.

History of the Industry

The penetration of insurance is low because traditionally awareness in the area of non life insurance has been low. For nearly 30 years post-nationalisation and pre-opening of the insurance sector, the focus was selling to corporates.  Individuals were not on the radar of insurers’ field forces as the cost of sale was disproportionate to the premium. The situation has changed with the deployment by the four State-owned and 15 private insurers of agents, corporate agents, brokers and bancassurance.

Importance of policy wordings

To the main topic. “Is insurance a safety net”, Mr Poncha’s opinion was “it definitely is, but that would depend on how well one understands what is covered and what is excluded, for unlike other contracts the insurance policy is a printed embedded contract. Unless you know what questions should be asked, you will not know what coverage you as an insured have bought.”

Insurance contracts (policies) are lengthy, using verbose legal language, time consuming to read and exhausting to comprehend.

For instance, a Personal Accident cover is the simplest policy but states that the coverage is in respect of death or disability following an accident by physical, external, violent and visible means. Would a claim be payable if you have ingested gas from a leak of gas which is invisible? Travel by private aircraft is normally excluded. Is the ordinary individual in a position to zero in on what the coverage is? This is further compounded by the fact that insurers will not offer interpretation of the policy at the time insurance is bought and which at the time of a claim, will be left to the Loss Adjustor appointed by the insurer to interpret the policy terms and determine the validity of the claim.

Why to negotiate terms of cover

Every cover needs to be properly negotiated so that the essence of any contract is met which is that both parties understand “the same thing in the same sense.”  At present there are insurance policies where regulations do not permit alteration of one word and there are others where alteration can be made. The scope of cover can be increased or it can be voluntarily reduced depending on the perception of the risk by the insured. Premiums also are subject to negotiations.  No doubt, to be able to do so the insured would have to be guided by an independent professional

Efficiency rating of the functioning of the industry

The public sector insurers are burdened with a legacy of the past and the private insurers have been in business anywhere from 2 to 10 years and have a long way to go. Post de-tariffing insurers are facing serious problems in that market forces are at odds with sustainable premium levels. Availability of trained
manpower is far short of the industry’s requirements. All this has resulted in a serious deficiency in service and addressing this deficiency is not being accorded the top priority it merits.

The other serious problem is that insurers are functioning in isolation of the needs of the consumer as the demand side is not involved in the industry’s plans and development of products.

The Insurance Ombudsman

Mr Poncha said that this channel of grievance redressal is, unfortunately, available only to individuals insured and in regard to claims where a claim is less than Rs20 lakh. The period for settlement of a dispute before the Ombudsman normally takes about six months. The process is, therefore, not lengthy nor is it expensive. Additionally, the insured has the advantage of not being bound by the order of the Ombudsman and can seek other forums for redressal. On the other hand, the insurer is bound by the order of the Ombudsman. The Ombudsman’s scope should be widened to include other entities whose recourse at Court is lengthy and very expensive.

Feedback from the audience said that the insurance Ombudsman scheme is not well known or as widely publicised as the banking Ombudsman. Also, nobody even answers the telephone numbers in the insurance Ombudsman’s office.

IRDA Regulations/Code of Conduct

In life insurance, if a claim is not settled within a certain period after the claim is made and all documents submitted, then interest starts. In non-life insurance, if the claim is not settled within 10 days after the final offer of claim is made, then only interest starts which is grossly unfair as there is no penalty on an insurer for unduly delaying making a final offer.

Mr Poncha said that a Code of Conduct for insurers was supposed to come out in 2002, however, till date there is no code of conduct in place. Yet in the pre-nationalisation days when there were 107 insurers, there was a voluntary code of conduct that was subscribed to by all.

Who can insure?

Only if you have an insurable interest, i.e., you stand to suffer a pecuniary loss if something happens can you insure. If you do not have any exposure then you cannot insure,” said Mr Poncha. However, one can have an exposure and, therefore, insurable interest even as a creditor, as an employer, as a bailee, etc.  It is not restricted to ownership.

How much insurance is enough?

“An insurance policy is based on the principle of indemnity, i.e., you 
should be put back in exactly the same position as you were before the happening of the occurrence which led to the loss. The principle of indemnity is an absolute principle, so you should not insure for more than the maximum you stand to lose,” Mr Poncha said. He added that it means that one should not seek to make a profit out of a misfortune. “However, there are exceptions to the rule— life insurance is one of them, because there is no value one can put on a life,” he said. There are other exceptions too such as personal accident insurance, objects of art, marine insurance etc. which can be “Agreed Value” policies.

How should you insure?
Unlike every other contract that is governed by the principle of “buyer beware”, the insurance contract is based on the principle of “utmost good faith.”   “Everything and anything which is within your knowledge and which could influence the insurer deciding on whether he will grant or not grant or impose certain terms and conditions, must be stated and declared by an insured to the insurer,” said Mr Poncha.

So you are required to declare material fact to the insurer. Failure to do so could render your contract voidable, as it would constitute a misrepresentation under the Law of Contracts; a simple example would be if you are a smoker you must mention that in your life insurance proposal.

Take on Personal Accident Insurance

“We have the cheapest personal accident cover in the world. The same cover overseas would cost more than 20 times. The maximum one would pay for a personal accident insurance in India for someone engaged in sedentary work would be Rs110 for a Rs1 lakh cover,” said Mr Poncha. He says people in India are on to a very good thing in the personal accident cover, adding that it is a necessary and essential policy for people.

It covers you for accidental death, permanent total disablement, which is the loss of any two limbs, eyes, hands and legs. Mere loss of use of a limb is not recognised. It has to be amputation at the wrist or ankle or going blind, not just impaired vision. It can be a combination of any two in an accident and the compensation can equal the death benefit. If in an accident you survive, but both your arms are gone then you get sum insurance covered, this is because you are permanently disabled. If it is only one limb, then you get half of the cover.

He added that it is a very good comprehensive cover. It will cover you even for the loss of a thumb, loss of a first phalange of your finger, etc., all clearly defined in the policy. Mr Poncha stressed that no one should be without personal accident cover.

Issues with the two-wheeler sector

People having motor vehicles must have third party motor insurance, as per the Motor Vehicles Act. However, nearly 50% of people who are owners of two-wheelers are reportedly only insured for the first year as they do not insure themselves for the next year onwards.

“There is a constant debate as to why not make it a life-time or a 15-year policy and instead of doing that insurers are saying that they might want to review the contract from year to year. The true sufferer is the innocent victim on the road,” Mr Poncha said, “as he has to pursue the uninsured owner of the vehicle” and not the financially solvent insurer if there is no insurance.

How is insured declared value of a motor vehicle calculated?

The insurance is split into Insured’s Value (IDV) and premium. “Even your brand-new car cannot be 100% insured,” said Mr Poncha. The IDV has a very strict formula and is fixed. For instance, a new car will be insured for 95% in the first year, reduced in the 2nd year by 15% and then 10% each year up to 5 years.  You can negotiate a discount ranging from 30% to 50% from insurance companies.

Treatment of Senior Citizens

Mr Poncha said that the experience of senior citizens with insurance companies is appalling. As one grows older, one’s health deteriorates and that is the time one requires health insurance the most but one is unable to secure full meaningful cover. In India most companies are reluctant to provide insurance for mediclaim coverage after the age of 65.

Mr Poncha said the senior citizens can opt for an insurance cover that provides a limited coverage for health insurance. However, something is better than nothing.

How does mediclaim work?

Mr Poncha said that people are getting a pretty good mediclaim insurance package. Insurers are losing money on mediclaim because against Rs7,000 crore of premium in India, the claims are around Rs9,700 crore. Besides this, there are acquisition costs, intermediary costs, etc.

Hospitalisation expenses in metros go up by 18% to 22% per annum. For the same plan, for which employees are insured with us in Mumbai and employees insured in Tier 2 or Tier 3 cities, the hospitalisation cost is 40% lower.

He said that at one time there was an idea that there should be higher premium in metros than in other cities. Mediclaim, as it exists today, is a damn good deal for the insured because one pays a lower premium than what one should pay and still get significantly good coverage.

View on third party administrators

Mr Poncha said that third party administrators (TPAs) were appointed by insurers to administer claims in a fair and expeditious manner. In actual fact this has not been the case and despite the authorities being aware of this, no remedy has been put in place and his views on TPAs’ functioning were not favourable. He said, “I have a contract with the insurance company and not the TPA. So, there is a privity of contract between the insured and insurers. Personally, I am allergic to TPAs functioning and insurers keeping arms length from claims.” 

The illusion of cashless

“Cashless is an illusionary advantage,” Mr Poncha said. In order to receive cashless facilities, you have to get an authorisation by the insurance company or a TPA before you go into a hospital and regrettably no differentiation is made by TPAs between emergency and planned hospitalisation. 

Insurance cost/inflation

In response to a question that should not claims be index-linked and should not benefits offered be greater, Mr Poncha said, “Everything is possible, but are people ready to pay? So, let us look at it from an insurer’s angle.” He added that any business transaction is a good transaction if both parties have a reasonable chance to benefit from the same. He said on a like-to-like basis in the UK and the US, the premium is 25 times that in India. Besides, the claim cost, insurers have to look at other costs like acquisition costs and administration costs.

Credit Cards

He also said that insurance offered by credit card companies cannot be relied upon, as they do not provide you with the policy details. He gave instances of claims for PA cover linked to credit cards having been rejected on the ground that terrorism was not covered. Several families of victims of the July 2006 train blasts were traumatised at finding that they were not eligible to make a claim. — Moneylife Digital Team