“Look, if you want to maintain our friendship, please never talk to me about Life Insurance again!” said her friend on the phone when she informed him that she had recently been appointed as the C. E. O. of a newly-formed private sector Insurance Company set up by one of the finest ‘Financial Brands’ of India.
How does yours truly know this? Because, this yours truly, incidentally with 18 years of Life Insurance Industry experience then under his belt, was present in the cabin where this conversation took place on a speaker- phone.
If ‘she’ has to hear this, what about those millions of Insurance Agents (howsoever they may adorn themselves with glorious titles such as ‘Life Advisor’ or ‘Financial Consultant’ or ‘Welfare Planner’ or even ‘Happiness Dispenser’!) who too are subjected to much worse responses and acidic comments than this?
Unique peculiarities of Life Insurance product
Let’s face it at the outset that Life Insurance is a vastly different product from the rest, even in financial world.
It brooks no comparison. Some of the distinguishing features of this product are:
To get the right perspective, it would be worthwhile to throw a quick glance at the journey so far. Some crude sort of Insurance - both Life and General – did exist in the pre-historic times, but the real commercial insurance emerged from Europe in the 17th Century.
It arrived in India in 1818 in form of Oriental Life Insurance Company in Kolkata. Without going into
intricate details, the travel till now can be summarized in 4 phases:
The era of privatization can further be classified into phases, characterised by different shades of performance:
When the Private Life Insurance Companies entered the Indian market in 2000, they faced a formidable competitor- the giant, monolithic, L. I. C. (Life Insurance Corporation of India) that enjoyed a high Brand Equity and trust of the customer, not only in urban areas, but also in rural. Backed by the ‘guarantee’ from Government of India, this Public Sector Organisation had done a commendable job of insuring millions of lives across the entire nation. The ‘two-hands-protecting–a – burning –lamp’ logo of LIC was (and still is) hardly unknown to anyone.
The major portion of LIC’s business consisted of Endowment type of policies, giving both security and returns to the insured. The most popular product of course was the unique ‘Money back’ policy that gave periodical returns of Sum Assured to policyholder, all the while continuing his life cover. Many other plans were variations of the above two.
Rightly realising that it would take decades to snatch market-share from LIC on its ‘home-turf’, almost all private companies came out with other types of policies to attract the customers – ULIPs (Unit Linked Insurance Plans) being the major cherry.
The ULIP Plans caught fancy of the insuring public and quickly become immensely popular. Some Companies had as high as 90% contribution from these Plans. The main reasons for this phenomenon can be summarized as follows:
So, there was joy all around. But happy days don’t last long. Two disasters were waiting to happen:
The image of the entire Life insurance Industry was tarnished. The investor confidence plummeted to unimaginable depths, causing wide-spread turmoil.
Then came the correction. With a succinct comment, “The party is over!”, the IRDA came out with strict guidelines for ULIPs in 2010, putting several restrictions on the Companies- all aimed at enhanced policyholder protection.
But it’s very difficult to restore fractured confidence of the public. People had lost their faith and trust - the very foundation of Insurance Industry –along with their money. It is a tough task to regain the lost glory. Presently, the entire industry, including LIC, is in the process of winning back the customers, once again with traditional Insurance policies. This is where comes in the ‘Human Life Value’ concept.
Insurance was invented for the purpose of risk-mitigation and risk-management in the face of uncertainties of life.
As opposed to General Insurance Contracts which are basically for indemnity (if your house worth Rs. 40 lakhs is destroyed totally in a fire and you were wise enough to insure it, the Company will indemnify / compensate you with that amount), Life Insurance Contracts are of a different nature . One can determine the value of a material object loss, but how does once decide the value of a human life?
All human beings generally engage in economic activities to satisfy human needs and wants, aimed at ensuring security. Therefore, economic security has been defined as “the achievement of a feeling of certainty and comfort, sense of fulfilment and mental peace through acquisition, ownership and use of economic goods.”
The essence of insurance lies in sharing of losses and substituting certainty for uncertainty. Life Insurance fundamentally makes good the financial loss suffered by a family by the premature death of an earning family member. But how does one determine ‘the earning capacity’ of a person in view of uncertainties about his longevity and future earnings?
Prof. S. S. Huebner came out with the concept of Human Life Value in the early Twentieth Century. It was indeed a remarkable contribution in the field of economic theory. For the first time, as attempt was being made to ‘capture’ the exact value of a human life.
The Human Life value has been defined quantitatively as the ‘Capitalized Value of the net future earnings of an individual after deducting appropriate costs for self-maintenance.’
In other words, it is the present value of the net total income of an individual which would be lost to the family in the event of his untimely death. This economic loss could be for a family by the death of its bread-winner, as well as for an organization in terms of the value of his services to that organization.
In 1924, S. S. Huebner of Wharton school of Finance and Commerce, University of Pennsylvania, U. S. A., propounded the HLV concept as the ‘economic foundation of Life Insurance.’ This concept has five vital aspects:
Further, the Human Life Values can be lost on account of:
This loss can be capitalized and indemnified only through life and health insurance. By guaranteeing this capitalized value in case if his death, life insurance tries to perpetuate his earning capacity for the benefit of his dependents.
Put simply, “A man may die; but his income should not.” Thus, life insurance acts as a hedge against such a loss. It’s the only scientific method that will help the dependents of an unfortunate ‘departee’ to maintain their life-style even in his physical absence, and obviously his ‘economic’ absence.
Estimating a person’s HLV involves determination of four quantitative factors:
To illustrate further, Mr. XYZ, aged 35, earning a gross income of Rs. 2,00,000/- p.a. today, will retire at the age of 65. Out of his monthly salary of Rs. 16.666/-, he uses Rs. 4,666/- per month for income Tax and his other personal expenses. So, his net annual income is Rs. 1,44,000/-
Assuming a 10% growth in his income every year, he would have a net earning of Rs. 2,36,87,051/- in the next 30 years till his retirement.
The present value of his net earnings, discounted at the rate of 8% (usually the current Bank interest rate) is Rs. 23,54,492/-
If he doesn’t return home today, his family will lose this amount forever. Therefore, Mr. XYZ’s Human Life value =23.55 lakhs.
[Though one of the assumptions in the above simplified example is rather unrealistic – unchanged future maintenance cost – the above example should suffice to explain this complex economic concept even to a layman].
In common language, he must have a policy that covers his life for this amount.
To anyone who hears this explanation for the first time, it arrives as a ‘bolt from the blue.’ Many insured people – who otherwise are firmly ensconced in their ‘comfort zone (throne?!’) of ‘being- completely- insured ‘mental make-up –are rudely awakened to realize the woeful inadequacy of their insurance cover. Tragically, most people have bought their insurance policies, not for risk cover, but for incidental reasons such as I. T. relief, savings, salesman-pressure or being misled.
It is obvious that no caring and sensible individual with a family can sleep peacefully after learning about his actual HLV. Whether rich or middle-class or poor, hardly anyone in India is ‘adequately insured’ to the full extent of his HLV. (On the contrary, there are many ‘multiple policy owners’ who actually feel that they are over-insured! Didn’t anyone ever tell them the famous aphorism: ‘No widow in the world has ever complained that her husband was over-insured!’)
Very few salespersons in India sell Life Insurance as Life Insurance. Out of 2.4 million Agents of LIC & all the 24 private companies, only a handful of them use the HLV in selling and convincing the clients. India is not only a highly uninsured nation, but also highly under –insured populace.
In the developed countries, enlightened customers always buy life insurance basically for covering the risk. As a result, they buy only Term or Whole Life Insurance policies, whose premium is much lower than the Endowment/ Money Back types of policies. (This also answers the question of those who say that they want to cover their full HLV, but don’t have enough money to pay the premium.) In other words, they separate the two worlds- insurance and investment.
No wonder that despite 58 years of LIC’s and 15 years of private insurance companies’ operations in India, the percentage of Insurance penetration (measured as the ratio of premium to GDP) in our country remains abysmally low, as evidenced in the following chart:
U. S. A.
in its name. It should start several initiatives- such as public seminars, articles, advertisements, lectures, T.
In view of the extraordinary demographic dividend, untapped insurance potential and unfulfilled demand for infra-structure & consumption, several analysts project that India will be the largest economy in the world by 2045.
Even institutions such as Goldman Sachs (‘India could be 40 times bigger by 2050’) and Citi (‘India will overtake China & U. S. A. by 2050’) have reposed their faith in the glorious future that awaits India.
The World Economic Forum forecasts that India could be a world leader in Insurance by 2030.
Having said that, it must also be acknowledged that there are several road-blocks in this path such as illiteracy, poverty, poor infra-structure, low policy-reforms, corruption and a variety of other related issues.
But the fact still remains that insurance industry will play a very crucial role in this economic resurgence of India. The passing of insurance Bill by the Parliament today (12/03/2015) allowing to raise the foreign equity from 26% to 49% is likely to bring in Rs. 62000 crore in India, giving a further boost to the industry. It would not be an exaggeration to say that the engine of Indian economy is driven mainly on the fuel (in the form of premium collected) provided by insurance industry. And the only way to augment this supply would be to use the HLV –concept- based selling, thus collecting huge premium and spreading the security of life Insurance in the far and wide corners of the country.
Human beings are the only one on planet Earth who are aware about their mortality. Strangely enough, we
mortals also believe in our immortality. Hence the reluctance to buy life insurance.
We all KNOW that someday we’ll die, but we don’t FEEL that WE will die. Therefore, we all NEED insurance, but we don’t WANT to buy insurance. Hence, insurance is always SOLD, and never BOUGHT. That is the dichotomy of life - and life insurance. Howsoever difficult and unpleasant the selling of Life Insurance may be, it has to be done –to ensure economic security, emotional stability and human dignity. In today’s materialistic world, we seem to be attaching economic value to every other thing except the most important of them all
– the human life.
It is high time that human life is sanctified through the sacred profession of Life Insurance based on the hallowed concept of Human Life Value.
Prof. Arun Patil
MET Institute of Management, Mumbai