Picture this: A country with the largest population of Earth. 5th largest economy in the world. 10th largest insurance market in the world.  And: Life insurance penetration is just 3%…Moreover, surrender rates of life policies are through the roof! Where is the life insurance awareness you ask? Or is it because of inflation? Let us explore.

Inflation was really red hot in the past couple of years. Please see the table below:

Inflation did cross 6% in 2022, meaning it could be one of the reasons for high surrenders. People cannot afford the pricy policies when having food on the table today is hard enough.

Understood. But is that the only reason? Data suggests otherwise. According to the council for insurance ombudsman (CIO) annual report 2022-23, there was 12.5% growth in the complaints received by the life insurance ombudsman. It is no secret that the majority of these cases refer to insurance mis-selling. The one who cannot afford the premium does not go to the ombudsman either. 

Besides, surrender values applicable aren’t any great, yet, people are still opting for surrender claims. This should tell us something about why people want to surrender. They have come to think they do not need these products at any cost.

The public insurer LIC paid out 33% of their total payouts to cater to the surrender claims in the year 2022-23. Private insurers were even worse at 55%

Commonly, what happens is: At the time of financial year end, people buy life insurance policies in a hurry – aim is to save tax. Life insurance products are often bundled as insurance + investment products. As a matter of fact, such products are popular with the agents as they carry handsome commissions. Agents have every incentive to sell these products right, left and centre – be it rural, semi-urban or metro customers.

After some months, policyholders realise they made a mistake! The policy is going to yield them meagre 4-6% returns which may or may not beat the inflation. Plus, it demands a hefty premium. At that point, the struggle for surrender starts. If we check what went wrong in the first place, we find that there was utter lack of life insurance awareness.

Had the customer been aware, the agent could not have sold him a worthless policy. Just check the map of India in the infographic below. It shows state-wise per capita new premium in the year 2022-23. We Indians are spending  at least in hundreds per head on life policies. 

Now, compare it with the premium of PMJJBY – the basic insurance cover offered by the government. It offers Rs 2 lakhs cover at yearly premium of Rs 436. There isn’t a single state in India where people are not allocating enough to at least get this cover. Many states even have figures in thousands. 

This makes one thing clear. We have enough money to cover our basic life insurance costs. But, what we lack is life insurance awareness. We simply do not know which policy to buy. That is why, we and life insurers both suffer the high surrender rates. (Yes, you heard it right – High surrender rates are bad for life insurance business as well!)

Now, let us see what can be done to change this status-quo: 

Digital push

Inc42 tells us that India is home to 300+ insuretech startups. Such digitally native start-ups are known to disrupt the industry and we can expect the same from the likes of ACKO, Digit insurance and so on. 

The humble insurance content creator fraternity will also hopefully educate their audience to buy pure risk cover and not indulge into fancy life insurance products. They can also make their small contributions by spreading simple hacks, like for example: Ask for a surrender value certificate while considering surrenders. Don’t just go by the number your life insurance office manager quotes!

The IRDAI too, is adding their own flair in the industry using Bima Sugam, which will simplify policy purchase, servicing and claim settlements. They also have plans to introduce bundled insurance under “Bima Vistar”, a part of Bima trinity. 

Physical boost

The IRDAI is also pushing for Bima Vahaks (another part of Bima Trinity)  to make insurance accessible to rural India, where the coverage is just 10% as of now. Total policies sold all over India in 2022-23 were just 26.67 crore, indicating a healthy scope to increase the sales.

We will need Bima vahaks and 28 lakhs+ life insurance agents to up their game to get life insurance awareness problem sorted along with changes in commission structures of the agents. Another metric they need to tackle is women’s life insurance awareness. (Women’s share in life insurance has stagnated around 34%)

After all, the veterans in the insurance industry say – Insurance cannot be sold like chocolate with different flavours over the counter or at a single click. It is a complex product (even pure term insurance can get complex with riders and other parameters like exact coverage needs) which needs digital speed and human touch. Thus, we need the phygital model to crack the life insurance distribution problem in India.

Finally, we are expecting the life insurance sector to grow at 7.1% per annum from 2024-2028. To put things in perspective, developed economies have life insurance penetration over 90% and we are trying to reach there starting from mere 3%.

While this indicates a huge untapped market for life insurance, let us not forget that the soul of good sale is education and we have to scale the industry by building on proper life insurance awareness. Otherwise the total insuretech + Bima trinity becomes an exercise in vain – with surrender numbers mounting forever!

Note: The article is for informational and educational purposes only. Not advice. Please consult a SEBI-registered investment advisor before making any investment decision.