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2 thoughts on “Life Insurance: An endangered species called Traditional Product

  1. This is again a good and informative article written.

    As per the article, the main reason for disappearance of traditional products in many life insurance market is lack of transparency. I differ a little and can say that lack of transparency is one of the reasons and not the main reason for losing the relevance of traditional plans. There is another main reason for loosing a charm of traditional plans such as impact on them due to declining interest rates in those markets. There could be other reasons a well.

    As far as cross subsidy is concerned among policyholders, I feel that the whole concept of insurance is standing on a platform of pooling risk mechanism wherein an individual gets the benefit (death benefit) at the cost of other surviving individuals (premiums collected from these surviving individuals).

    To avoid injustice across generation of policyholders and across various products, insurance company generally tries to declare one off bonus to the policyholder-terminal bonus at the time of exit-death/maturity. This terminal bonus is over and above the regular reversionary bonuses which are declared on regular basis. In mature markets there is a With Profit Committee and also the insurance company publishes the document PPFM (Principles and Practices of Financial Management) for with profit business which broadly covers the bonus declaration philosophy, calculations of various technical items such as Asset Share calculations etc.

    In the With Profit Committee apart from other members ,one independent actuary is part of the committee.Committee looks at various technical and non-technical (Policyholders Reasonable Expectations) parameters and then only recommends the bonuses for declaration purpose. Similar type of practice has recently been followed by Indian life insurance companies as well due to the recent regulations on With Profit Committee.

    As far as commission scale is concerned, I do not think that all the intermediaries sell the product just by looking at the commission structure. Now a days, professional intermediary does the Need Based Analysis of the prospect and recommend the product as per his future needs.

    I may slightly disagree with the article wherein it is mentioned that traditional products will disappear from the Indian market due to lack of trust from the customers. On the contrary, Traditional products have been popular in Indian market for more than 100 years (even before the birth of LIC) and it will continue to breathe in future as well. On the other hand, ULIP products are sentiment driven products and attract customers when the stock market performs well and repel customers when the stock market nose dive or shows volatile trait for some time. This is because many customers are unable to see the benefit of remaining with ULIP plans for a longer period. This is not the case with traditional plans.

    In summary, an insurance awareness programs, seminars and workshops with the common citizen of India will help the common man to demystify the insurance.

    My views may not be valid and correct but I have tried to see the other side of the coin as well.

    1. Hi Suresh, I agree transparency is not the only reason. Regarding cross subsidy, even terminal bonus is generally uniform across the product, sometimes banded. So, there is a cross subsidy. Otherwise, the bonus for each policy will be different. Some cross subsidy is fine but not a lot. Regarding commission, some agents are doing need analysis but the number is almost negligible and that’s the issue. Finally, I also hope traditional products don’t die. 🙂

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