Life assurance schemes or assurance scams?

The process of how insurance is sold needs a fundamental change. The industry needs to organise and to self impose this because poor agents cannot survive, then more are recruited, and then standards drop, and then there are complaints, and then the situation invites people like this writer to take pot shots at a respectable product and career.
The writer did not frame the issue.
The correct issue is cost of collection. If premium, even if it is modest, can be collected consistently, the general public will be able to pay for valuable insurance protection. With continuity, the insurance companies have the funds set aside for claims. Right now, insurance companies in Sri Lanka will find it hard to get reinsurance support, and this in turns leads to higher cost of getting insurance products to the market.

I read with interest an article published in your paper September 17, 2006 “Life assurance schemes or assurance scam?”

First, I agree that there should be more coherent regulation of the industry especially in the area of distribution: How is the insurance proposition explained to the general public? While the issues were outlined, the matter got muddled with other allegations.

As a result, the general public might be misled that all insurance companies are greedy and profit-driven, and all insurance distributors are not above board, and worst still, savings considered a substitute for financial protection.

There are a few areas to be addressed.
* Product and the sales processes,
* Premium payments and management of the life fund
* Claims process and finally,
* The usefulness of insurance products.

Product and the sales process
Life insurance will always be sold and not bought. So, the sales process is proactive marketing: Deploying, hopefully, trained and dedicated life insurance agents and brokers to reach out to the public. The intent is to provide financial protection to the working population.

The writer paints a picture with “a large army of life assurance representatives…” when the fact is that Sri Lanka, as a percentage of population, does not have enough insurance agents to service the general public. Taiwan and Malaysia with a similar population size have at least 100,000 agents.

The life insurance product, at its essence, is very simple: The primary function is a promise of financial payment to the family or beneficiary with a secondary function of a long term saving. Not an investment element, but a long term savings feature that provides modest returns for a period of consistent deposits over 10 to 20 years.

Sir Winston Churchill once said that with a modest sacrifice of pennies a day, every family should have insurance to protect against unforeseen events that can forever wreck their future. So, the life insurance product is a very logical, very fundamental and very useful part of our lives.

All life insurance should be sold as financial protection as the primary function and savings, again, not investments, as the secondary function.

It is not the product. It is the PROCESS that the regulators need to focus on, and this will need the cooperation of all the insurance companies and most importantly, their agents and brokers.

Premium payments and management of the life fund
With phrases like “millions go into their coffers”, “sly move to get more of the poor man’s premium”, “you should”, “unclaimable wealth accumulated without any risk”, “shows sympathy (rather crocodile tears)”, “just imagine the billions”, the insurance industry is already indicted without trial and these are very extreme views tainted with emotional words.

I believe the life insurance products are more tightly regulated than any other products. The chief actuary in every life company has two roles:One representing the company, and the other representing the regulator. The chief actuary cannot do anything contrary to the actuarial code of ethics, and the life company, can be reported to the Insurance Board of Sri Lanka if there is any irregularities. This is a self correcting mechanism.

Remember, with the first premium deposit and issuance of the policy, each and every policyholder will enjoy life insurance protection. For something as low as Rs 2,000, you can get accident protection for Rs. 1 million a year. So, it is always protection first. Only when you have extra disposable income, then you think of saving more. Then, the life insurance with savings comes into play.

All life insurance premiums go to the life fund. It is tightly regulated as to what the life insurance company can do with the money. IBSL’s key role is to ensure the investment of the life fund is conservative and secure, and this is to ensure money can eventually be returned to the policy owner. This is also the primary reason why the short term return of life policies can not be so attractive not because of the commission paid out to agents.

Contrary to what the writer painted, commissions are not paid from the premiums collected. Commissions are paid by the life insurance company as cost of doing business. Like salaries, rent and utilities, commissions are all part of expenses incurred for operating a company. Would you feel better if the agent was salaried?

If you take the writer’s logic, you should be able to get a large discount for going directly to the wholesaler, which is the life insurance company. You will find the same premium for the product sold by the agent, the broker and the bank.

The writer did not frame the issue. The correct issue is cost of collection. If premium, even if it is modest, can be collected consistently, the general public will be able to pay for valuable insurance protection.

With continuity, the insurance companies have the funds set aside for claims. Right now, insurance companies in Sri Lanka will find it hard to get reinsurance support, and this in turn leads to higher cost of getting insurance products to the market.

In Singapore for example, the recurring bank transfer, sometimes called “autopay”, was free for almost 20 years. Today, most banks in Asia provide this with a very small fixed charge. We do not have such facilities in Sri Lanka. Finally, to round off this point, the writer urged that the Inland Revenue should be informed of such “accumulation of such premium”. The fact is that life insurance companies are taxed like any commercial entity.

The claims paid to families are not taxed, by law. So, how can the “accumulated premium” be levied taxes? The capital gains can be taxed, but the premiums held in reserve are for claims liability. It is a technical area and the writer cannot simplify it to an extent that the wrong picture is painted.

Part three: claims process. The claims processor has to follow the guidelines. The writer made it sound like the claims manager is heartless. It is procedural and not emotional, and definitely not personal.

A key statistic the writer conveniently failed to point out is the TOTAL amount of claims that has been paid to beneficiaries over the years. Many of these policy owners may have been paying premiums for only a short period of time. There are many cases where only few deposits were collected and the insured suffered an accident. Claim still paid. That is why the claims process is rigorous. It is to protect the honest customers against the dishonest ones. And, there are the dishonest clients and dishonest agents that taint the industry. The IBSL will need to see how to work with consumer protection groups to protect the customer. Not easy because insurance products are complex. So, the industry itself must take a stand against dishonest agents. The claim in the case study quoted by him, involved medical underwriting which cannot be simplified so easily. It needs proper investigation to find out who is at fault.

Usefulness of insurance products
With financial and insurance products, a life saving plan or a medical coverage plan, they are complex and the customer will need time to understand.

Insurance products are sold based on needs. Insurance is designed to pay for bills that are unforeseen and may break a family. The writer is misleading by implying that seniors were sold the wrong product.

Insurance protection is intangible.
Life insurance goes by needs. Which young man or woman at the age of 30 will think of medical coverage? In Japan, companies sell, over the television, whole life plans with modest or no returns to seniors over 50 so that a “clean-up” fund is setup so as not to burden family members when it is their time to go.

The writer is also misleading with regards to surrender values. The insurance company spent quite an amount of cost to setup the policy on the system, print the contracts, and set aside reserves to accumulate interest. It is complex and costly.

A life insurance product takes up to 10 years or more to build the kinds of returns because it is subject to different rules from a bank. An insurance company must evaluate two things with each application: medical health and financial health. The bank only checks financial health. So, the insurance companies have two risks: claims risk and interest risk. So, how can the writer compare insurance to banks? Not the same.

The insurance did provide protection. One may not have noticed it, but this costs money. How can you hire a security guard, pay him for two years, and after two years, when there are no robberies, ask for his salary back? Service and protection were rendered. There must be a cost to protection. Perhaps the insurance companies had service staff that did not know how to explain the situation. But, the writer cannot paint the insurance companies out to be manipulative.

Finally, the writer’s “advice to the general public” cannot be more incorrect. Saying a broker is a preferred avenue is incorrect. The writer conveniently left out the fact that brokers can represent a few insurance companies. By concept, the broker is also paid a fee for this advice.

Brokers, like agents, will be advocating products with commission advantageous to their remuneration. Remuneration drives behaviour. Finally, brokers tend to serve a niche upper middle class market as their services are not cheap, therefore, depriving the general public of valuable financial protection. Agents, a good number, well trained and motivated, are the answer: same as all our Asian neighbours because in Asia, the value system is personalized services for something as intimate as life insurance. There is no proof that a broker or an agent or a bank will do a better job. Presently, many countries ensure that all channels are governed by the same compliance rules in serving the public for each insurance sale.

Another advice: “take short term policies, if you want to benefit” is not entirely right. All life insurance products that accumulate savings will take more than 10 years. It is mathematical. A sum of money will take up to 15 years to double at an interest rate of 5%, and it will take only 5 years for an interest rate of 15%. No financial product provides guaranteed interest of 15% for five years. So, long term, defined as above 10 years, is the only way to go.

The final misconception that must be corrected is that a savings account can be a replacement for an insurance product. Savings in a bank is for convenience, not for accumulating money. To accumulate money, there must be an instrument where money can go in, and cannot get out. Only then, can money accumulate and interest can work. A “savings account” is actually quite a contradiction. With each “savings account” you get access to automatic teller machines (ATM) where you will probably take out ALL that you earn, and on top of that you can get loans. Meaning you will spend more than you earn. What is the logic to that?

Everyone needs to have both: a bank account for the convenience of transactions, and set aside up to 10% for a long term insurance product. In all cases, the need is for the consumer to spend less, save more and stay disciplined.

So, I hope everyone as a customer: works hard, spends less, saves more and always be an educated consumer. Sri Lanka is a great nation with a long history of education and once the envy of all Asian countries. We will prevail if we examine issues without doctoring them or inflaming the issues with unnecessary emotions.

I do support sensible regulations. I do want the insurance industry to start practicing self regulation. I do want to see agents and brokers and bankers become more caring sales people because the insurance product is unique and it takes a lot of sincerity and effort to promote. I have been at it for over thirty years and still going and still very proud of being an insurance professional.

(The writer has an experience over 25 years in the field of Life Insurance. He is a Fellow Member of Chartered and Management Accountant and a Fellow Member of Life Insurance Management Institute in USA. Presently he serves as an Insurance Consultant for life insurance companies abroad).