29/03/2017
How trustworthy are private insurance companies...?
Indians have an inherent mistrust of private companies in the insurance sector and think twice before buying their policies. This prevailing lack of confidence in private players stems partly from their being relatively new entrants to the Indian insurance scene.
Private insurance companies emerged in the Indian market as recently as in the year 2000. Prior to that, Indians flocked primarily to the public-sector Life Insurance Corporation of India (LIC). Even today, people continue to place unquestioning trust in LIC and exercise caution when dealing with private insurers.
So what do you do when a private insurer offers a better policy than your trusted public-sector insurance company? Whatever you misgivings may be, private insurers are not crooks looking to take off with your hard-earned money. I can say this with confidence because:
(a) all insurers in India are governed by the IRDA,
(b) there exist tremendous restrictions on setting up an insurance company,
(c) all insurers must maintain a solvency margin and
(d) insurance companies cannot shut down because of the merger clause.
Let us now examine the four abovementioned aspects in detail.
(a) Regulated by the IRDA – First of all, the Insurance Regulatory and Development Authority (IRDA) regulates the formation and operations of insurance companies in India. The IRDA is a strict regulator that prioritizes customers over companies. Insurers are bound to follow the IRDA guidelines that govern the running of both public and private insurance companies in the country.
(b) Restrictions on Forming an Insurance Company - Insurance companies are not fly-by-night operators that set up shop whenever, wherever. The IRDA makes it very difficult for parties to establish insurance companies. For instance, consider the amount of start-up capital required. Since 1999 (the year the IRDA was established), new insurers have had to deposit Rs. 100 crore with IRDA. But the IRDA indicated last year that given rising costs, new insurers would have to deposit at least double the amount in future. Such figures make it impossible for any but the wealthiest companies to enter the insurance market.
(c) Solvency Margin – The solvency margin refers to the excess amount of assets that an insurance company must maintain over its liabilities. This ensures that in case the insurer’s liabilities increase unexpectedly, the insurer will have sufficient assets to pay off this sudden rise in liabilities, and thereby avoid going bankrupt. Insurers in India are required to maintain a solvency margin of 150 percent. In other words, for every Rs. 100 insured, the company must maintain Rs. 150. If the insurer becomes insolvent, the solvency margin will enable the Reserve Bank of India to repay affected customers.
(d) Merger Clause – While forming an insurance company comes with numerous restrictions, winding it up is not an option. The Insurance Act states that in case an insurer cannot continue business sustainably, it must merge with another company. The insurer cannot hope to run away leaving its customers in the lurch.
You can thus rest assured that the private insurer with the great policy is not going to make off with your money. The IRDA and insurance laws ensure as much. Nevertheless, if you do end up having a dispute with the insurer (whether public or private), the insurance ombudsman, consumer forums and courts are there to help.
