ISSN: 1391 - 0531
Sunday, November 12, 2006
Vol. 41 - No 24
Financial Times

What you need to know about insurance

The Insurance Board of Sri Lanka (IBSL), the independent body set up by the government to regulate the insurance sector, will be initiating a series of articles to provide information to the consumers to promote consumer understanding of the insurance system. This article gives information on the insurance industry in Sri Lanka, understanding life assurance, its importance, types of life assurance products offered to consumers and important facts in choosing a life assurance policy. The responsibilities mandated upon each participant of the insurance sector and matters relating to General Insurance Business will be dealt later in this series of articles.

Insurance industry
Sixteen insurance companies (insurers) registered with the IBSL are presently underwriting insurance business. Twelve of them are composite companies; three engage in general insurance and one is involved in long term insurance business. When a company is registered to transact in both long term insurance and general insurance business, those companies are recognized as composite companies.

Fifty four companies are registered with the IBSL as insurance brokers and they engage in insurance broking business.

Apart from traditional insurance policies, insurance companies design various types of insurance products for the public. Insurance companies and insurance broking companies engage agents and in-house sales teams to sell these insurance products to the public. The insurance broking companies function as intermediaries for placing insurance business with the insurance companies.

The insurance companies and brokers appoint agents and they are required to maintain a register of agents on a continuous basis. The agents are not salaried employees. They are paid a commission for the business they bring to their companies. The insurance agent can work only for one insurance company or one broking company. The Board has mandated passing a pre-recruitment test for the agents. Passing this test is one of the pre-requisites for any person to function as an agent. The Sri Lanka Insurance Institute (SLII) has been authorized to conduct the pre-recruitment test on behalf of the Insurance Board. The SLII issues an identity card to every person who qualifies to practice as an insurance agent on passing of the pre-recruitment test. Anyone interested in obtaining a Life Insurance policy through an agent should first ensure that the person selling the policy carries an ID authenticated by the SLII/insurance company or the broking company. Under the present law only individuals can function as agents.

Life Assurance Schemes or Assurance Scams?

By M.Z.M. Nazim

What has been expressed in response to my article in The Sunday Times FT is the perfect text book representation of Life Assurance, and this is exactly what is being taught.

Consequently, what has been written is theoretically, free from errors, which the writer (Haris Salpitikorala) and those experts whose livelihood depend on it believe, but what I evinced and conveyed is the practical aspect of the Life Assurance business that is being carried out here. In other words, what actually happens in practise was what was accentuated and emphasized in my article.

In addition to the plight of the mother which was published in my earlier article, I will give you two very recent cases regarding the Surrender Value component which the writer is trying to downplay. I am also forwarding the documentary evidence in this regard to the media concerned.

Case No.1
This is the case of widows, whose sons are now married and have no known source of income for her to continue the payment of her life policy.

She paid a premium at the rate of Rs.1518 per month for 40 months without a break. The total amount she had paid as premium was Rs.60,720. She, therefore, wanted to surrender the policy at this juncture. The insurance company offers her Rs.7,974 as a surrender value.

Case No. 2
Here is a case of a gentlemen who lost employment because the institution he was attached to closed down and he too did not have any steady source of income to continue payment of his life policy. He too had paid a premium at the rate of Rs.1778 per month upto July 2006 (final date of premium) - totaling a sum of Rs. 85,344. He too wanted to surrender the policy. The said insurance company offers him a sum of Rs.6,097 by way of surrender value. And both these policies were sold giving the policyholders the impression that their medical bills would be settled. When I made representations on their behalf and intimated to them that there had not been a single medical claim- this is what they wrote to me:

“Dear Mr Nazim -- I think one should not confuse charity with insurance. Let me remind you that had there been a claim on any one of the policies after a single premium was paid the full sum assured would have been paid. I do not understand your statement that not a single claim has been made.”

The statement clearly proves that the policyholders had been duped into believing that their medical bills would be settled or the insurance company did not know what it covers under its life assurance policy.

Please tell me who is going to hold a life insurance - umbrella to these two unfortunate people? You be the judge. If you (the public) are so gullible and naive and want to be chiselled out of your hard earned money, I can do nothing about it.

However, it is my intention that in the midst of squabbles and bickering, the main purpose of my article should not be lost. The attention from the real issue should not be diverted. This is a National issue, where the ordinary man on the street, not the insurance expert, is confronted with.

It is my sincere hope and desire that the regulatory body being the IBSL, which already functions efficiently, takes the necessary steps to look into some of the general state of things and the combination of various circumstances at a given time, spelt out in my original article, which the public is facing and take the necessary steps to minimize or eradicate them altogether at the same time bringing it to the notice of the public for their protection against damage and injury as well as their guidance.

(Business Editors note – correspondence on this issue is closed. We hope the IBSL will inquire into this complaint and take whatever action necessary.)

Regulation
The IBSL was established on March 1, 2001 as provided by the Regulation of Insurance Industry Act, No. 43 of 2000 for the purpose of development, supervision and regulation of the Insurance Industry of Sri Lanka. The object and responsibility of the Board is to ensure that the insurance business in Sri Lanka is transacted with integrity and in a professional and prudent manner with a view to safeguarding the interests of the policyholders and potential policyholders.

What is Life Assurance?
Life Assurance is “a contract in which the insurance company agrees to pay a given sum on the happening of a particular event, contingent upon the duration of human life or pay the sum assured on maturity”.

Though human life cannot be valued, a monetary sum could be determined based on the following:

1. Duration of the policy and/or Age
2. Gender
3. Individual Risks of the Life to be insured
4. Loss of income in the future years
5. A person’s ability to pay a premium
6. The purpose for which a policy is sought

Life Assurance has two components, i.e. a savings component and a risk component. Some may select to protect risks only while some may cover risk with a savings element. Life Assurance products provide a definite amount of money to the life assured or his/her dependants in case of death of the policyholder during the period or becomes disabled on account of an accident or sickness causing reduction/complete loss in his/her income earnings whilst the policy is in force. An individual can also provide for his/her old age when he/she ceases to earn and has no other means of income through purchasing an annuity.

Basic types of Life Assurance products
The basic Life Assurance products, which offer protection with savings, are as follows:

1. Pure Endowment product is one in which benefits are payable on a specified date if the life assured survives at that time. If the person whose life is assured died before that date, no benefits are payable under the policy.

2.Term Assurance products provide fixed amount of money on death during the period of contract. This policy provides protection for a selected period or term. The sum assured is payable only if the insured person dies during the period or term of contract, i.e. no payment will be made if the insured person survives the period of contract. Premiums are paid throughout the selected period.

a)Decreasing Term Assurance policy is similar to the Term Assurance policy, except that the benefit decreases annually until it is extinguished at the end of selected period. This policy is suited for a temporary need, which is reducing, such as housing loans repayable in installments. Premium may be paid in one lump sum or over the selected period.

b)Convertible Term Assurance policy is a Term Assurance policy with the option to convert to another policy (such as an endowment or whole life) without the evidence of health. The right to convert (change) is subject to certain restrictions, such as;

   a)Right to convert must be exercised within a specified period
   b)Conversion may not be permitted beyond a certain age (55 or 60)
   c)Premium will change after conversion

This policy is ideally suited for those who are about to begin a career.

3.Endowment Assurance products provide a fixed amount of money either on death during the period of contract or at the expiry of contract if life assured survives. Should the insured survive the term, the policy is said to mature. Thus the insured amount becomes payable either at death or at maturity. Premium is payable throughout the period of contract. There are two types of endowment assurance policies;

a)Participating policies where the policyholder is allowed to share the profits of the insurance company, which is usually paid as dividends or bonus.

b)Non-participating policies where the policyholder is not entitled for the profits of the insurance company.

4.Whole life Assurance products provide a fixed amount of money on death whenever it occurs. Premium may be payable till death or may be limited to a selected period (say up to age of 60).

5.Annuity/Pension policies provide a series of monthly payment on stipulated dates that the life assured is alive on the stipulated dates.

Insurers modify these basic types of life assurance products and add “labels” for sales purposes.

Importance of life insurance
Human life is subject to risks of death and disability due to natural and accidental causes. Loss of a life could result in loss of income to the dependents resulting in hardships to the family, sometimes making survival of dependents dreadful. Risks are unpredictable. Death/Disability may occur when a person least expects it. An individual can mitigate the effects of such unexpected risks through life assurance.

Life Assurance is useful in a number of situations, which includes:

a)Protection: The purpose of Life Insurance remains an important element in the event of early death:

-To ensure immediate family members (dependents) are able to finance their basic needs and are able to maintain their standard of living,

-To ensure dependents have cash and income to settle all bills, taxes, loans and fulfill other obligations,

-To ensure the children have money for their education, and

-To ensure that there is extra income when the earnings are reduced due to a serious illness or accident.

b)Savings: Providing for one’s family and oneself, as a long-term exercise (If a policy with a savings component is obtained for a desired purpose such as lump sum at retirement, marriage, settlement of loans etc).

c)Investment: The accumulation of wealth and safeguarding it from the ravages of inflation.

d)Retirement: Provision for old age becomes increasingly necessary, especially in a changing cultural and social environment.

What you need to remember when selecting an insurance product:
There could be countless options to choose from, policy types, and policy conditions. Anyone who desires to buy a life assurance policy needs to be diligent when choosing a policy to suit the needs. It is worth taking time to discuss with the insurance company or its intermediary (the insurance agent or the insurance broking company) about the policy that fulfills one’s requirements. Deciding the adequacy of the amount to be insured needs a careful consideration. Prior to deciding the sum to be assured, it is advised to analyse and compare the financial needs of the dependents and their potential earnings, one’s capacity to save and invest and potential returns of the policy, if any. The value of the insurance policy that one decides to buy should fulfill the gap.

Affordability is an important consideration and before a policy is effected, it is advised to examine carefully, bearing in mind possible future financial commitments, such as those which may arise following a change in civil status, parenthood, etc. Statistics prove that this aspect is not receiving adequate attention that is evident from the large number of policies lapsing, even after one year or several years, due to non-payment of premiums as the needs and the circumstances have changed since purchasing the policy.

It is advisable to avoid going for unwanted additional coverage, which comes in “packages”. Instead, a suitable additional coverage of one’s choice can be obtained at an additional premium, which gives better value for money. It is always advisable to buy only what really requires for the intended purpose and/or future requirements. It is a pre-requisite for a person who decides on a certain life policy to make sure that the life policy recommended is right for the purpose.

The other important factor is to make sure that the terms and conditions of the policy are understood properly. Insurance Policy is an evidence of a legal contract between the policyholder and the insurance company. As in other contracts, it is better to make sure that all provisions in the policy are understood and any doubts clarified with the agent/broking company or the insurance company.

Generally the insurance companies give a specific time period (majority of companies give 14 days) from the effective date of the policy within which a policyholder could reject the policy if he/she is not satisfied. In such situation a company will refund the premium paid, subject to deduction of initial expenses, if any.

In the next article we will discuss other aspects of Life Assurance such as the rights to insure, disclosure of facts, assignment & beneficiary designation of life policies, rights of policyholders in cancellation and lapsing of life policies, claims and settlement of life policies.

-IBSL could be contacted on ibosl@sri.lanka.net
 
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Copyright 2006 Wijeya Newspapers Ltd.Colombo. Sri Lanka.