Ever since the floodgates to the life insurance sector were thrown open to the private sector, there have been a plethora of insurance plans for individuals.
Individuals have been spoilt for choice. On last count, 13 life insurance companies were competing for business, the LIC included.
But the million-dollar question is: what are the parameters on which an individual can evaluate an insurance company before finally taking the plunge and buying life insurance from that company?
Here, we have laid down a few guidelines on how to evaluate a life insurance company.
1. History/track record of the insurance company
It's important that the insurance company, with whom you are about to enter into a contract for the next 25 years or so, has a sound track record behind it. It would also help a great deal if the said company has had some experience in the financial services/ asset management business; especially so, if it has dealt with customers at the retail level.
That way, the company would have a better understanding of the pulse of the retail investor. It would also be easier for an individual to evaluate the historical performance of the company before making a selection.
2. Expertise of the tie-up partner (foreign)
Historically, in the Indian context, life insurance always meant the Life Insurance Corporation (LIC). As a result, post-privatisation, none of the new insurance companies had the expertise to carry on the business of life insurance without the aid of an experienced partner.
This led to the arrival of the foreign partner on the scene. This was understandable since insurance products are quite complicated and therefore difficult to design. The foreign partner brings significant value to the table in terms of setting up the correct systems, processes and service standards.
Besides, the tie-up also helps in customising the product range as the foreign partner already has vast experience in product design.
While evaluating a foreign partner, consider its experience in the life insurance business, its track record in paying out bonuses and its credit rating by an international credit-rating agency.
3. Quality of the insurance agents/advisors and service standards
The insurance agent is the interface between a company and the individual. It is here, therefore, that the quality of screening of the agents before recruiting them and the training imparted to the company's agents comes to the fore.
Often in their bid to expand aggressively, insurance companies do not screen agents judiciously, which gives way to unethical practices in the system. Should you come across an unprofessional and unethical insurance agent, you can reconsider taking insurance from that company.
To some it may seem unfair to punish the insurer because of its agents, but we believe an insurance company needs to do its due diligence before enrolling agents.
An insurance agent is the 'ambassador' of the company, and if the company is not too concerned about the image its insurance agent is creating in the minds of individuals, then you can very well imagine its standards of service and ethics.
Service standards are important for another reason. The company should have processes in place in case of issues like policy servicing (especially in case of agents quitting), transparency, and providing customised solutions to individuals.
Service quality standards are also highlighted in case of claims disbursement; do individuals face any problems in claim disbursement, is claim disbursal prompt?
It is always advisable to ask the insurance agent about the track record of the company with respect to claims and ask for proof if need be.
4. Management style, underwriting norms
The management of any company is crucial for it decides on the long-term policies to be adopted by the company. This plays a key role in terms of the company's outlook and its style of functioning.
This is also reflected in what kind of underwriting norms the company follows. For example, some insurance companies are very aggressive in their approach towards garnering business; i.e. for them, the quantity of business generated is more important than the quality of lives insured.
This might impair the company's business in the near future, if many claims were to arise. Claims have an impact on profits and therefore, bonus declarations.
The more the claims, the lesser the company's profits; the lesser the profits, the lesser the bonus that can be declared.
5. Prudent and sound financial management
Sound financial management should be an important consideration while selecting an insurance company. The kind of returns an insurance company can generate is a direct result of how well it manages its finances.
Prudence can be gauged with the help of various parameters like good underwriting norms, low management and administration expenses and sound fund management (especially in the case of unit linked insurance plans).
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