The draft circular issued by the Insurance Regulatory Development Authority (Irda) on need analysis and prospect product matrix is a path-breaking initiative aimed at ensuring that appropriate products, matching the needs of the customers, are sold to them. It will also help tackle under-insurance, which is widespread among insurance buyers.
The need-analysis format should be convenient to use for the intermediaries for it to be successfully implemented. ICICI Prudential Life Insurance MD & CEO Sandeep Bakshi says the proposed format is difficult to implement in its present form and needs modification.
Similarly, Star Union Daichi Life Insurance MD & CEO Kamaljit Sahay says the implementation of the proposed format will affect business growth as independent advisors (IAs) will find it difficult to comply with.
The challenges from the customers’ side are similar to those faced by financial planners, that is, first, convincing the prospects that it will benefit them and, second, to get correct and complete data. Because any incorrect information on income, expenses and assets will lead to inaccurate assessments on the required insurance cover, which will defeat the very purpose of the exercise.
The proposal form is the basis of the insurance contract. The current proposal forms being used by the life insurance companies include the proposer’s medical history and the family medical history. So, it will be convenient if the current proposal forms are continued, but supplemented by a simpler need-analysis format. The need analysis can be scrutinised during financial underwriting.
How much insurance cover?
There are two ways to estimate the required insurance cover. Under the need-analysis approach, the present value of the future expenses and current liabilities are aggregated from which the available financial assets and existing life insurance covers are reduced to arrive at the required additional insurance cover. The future expenses will include the present value of children’s educational and marriage expenses and the corpus required to take care of the family’s day-to-day expenses to maintain the current standard of living. The liabilities are primarily home loan, car loan and personal loan.
But at an early life stage, the proposer may not have a family or dependents. The dependents and liabilities increase with life stages and, hence, the need for life insurance increases. Further, mortality charges increase with age; so, deferring life insurance becomes costly. It is, therefore, advisable to start life insurance at an early life stage. The Human Life Value (HLV) method, rather than need analysis, will be