It's a fact that term insurance policies that are sold exclusively online have become much cheaper than their offline versions. On an average, online term plans are almost half the price of an offline term policy.
Such steep reduction in premiums is largely due to the costs that insurers save by moving their plans online. "On an average, a term plan pays about 20-25% as commissions to the agents. Online, that's a straight saving. Plus, there is no cost in managing the distribution channel. You also save on cost by moving the paperwork in electronic form," said Rajit Mehta, executive director and COO Max Life Insurance Co. Ltd. The company does not have an online term plan currently.
Will online plans pay?
It is too early to say whether low online premiums will impact claims settlement and there are two reasons for that. First, lack of data. Insurers usually don't segregate their claim settlement record across products and the Insurance Regulatory and Development Authority also publishes a consolidated figure in its annual report.
The second, and the most important, reason is that most of these online policies have been sold only in the last few years. "Insurers have six months to investigate and settle an early claim that comes within the first two years of the policy. For policies older than that the claims need to be settled in 90 days," said Balram Sarma, chief (operations), Future Generali India Life Insurance Co. Ltd. Hence, the chances of claims rejection are highest in claims that are made early in the policy when the insurer carries out thorough investigation.
But if the online experience of the insurers is anything to go by, policyholders should not be too worried about the claims settlement capacity of their insurers. "The kind of profile of customers we get online is extremely good. The disclosures they make are outstanding and, therefore, our claims experience is likely to be far better," said Rajeev Kumar, chief and appointed actuary, Bharti AXA Life Insurance Co Ltd.
So what leads to more disclosures? Interestingly, the answer is the lack of agents. "We have seen the number of declarations is far higher in online plans than offline-that's because the customers are filling up the proposal form themselves," said Sarma.
The other reason is the size of cover that people buy online. "The average sum assured for online term plans is R70 lakh. This means most of these policies anyway need medical examination. This is not so for a large number of offline policies where the sum assured is usually very low," said Yateesh Srivastava, chief marketing officer, Aegon Religare Life Insurance Co. Ltd.
Aegon Religare was the first company to launch a pure online term product in 2009, but their claims settlement experience is not very encouraging. According to IRDA's latest annual report, in FY'12, Aegon Religare settled 66% of its claims and repudiated 32% of them. "This is largely because our book is still young and most of our claims are early claims. Also, for a large portion of our claims, we have noticed deliberate fraud. But these are mainly offline policies. The claims settlement ratio for our online policy is much higher," said Srivastava.
The big picture
While it is expected that the claims experience from online policies will be better, the overall claims experience of the industry is improving.
The picture gets better when you zoom out from online policies and look at claims settlement of insurers at large. According to IRDA's FY'12 report, there are about nine insurance companies that have settled at least 90% of their claims as compared with five in FY'11 and three in FY'10.
But there are still a few who have a poor claims settlement record. According to IRDA, in FY12 there are about five insurers that have settled less than 80% of their claims. For instance, Shriram Life Insurance Co. Ltd, which started operations is 2005, settled only 65% of its claims in FY12. "We sell our policies largely to tier III and tier IV cities and so we offer them easy underwriting. But we are strict at the time of claims. This experience is largely in our retail portfolio. For our group policies our claims settlement is 100%," said Manoj Jain, CEO, Shriram Life.
In addition to relaxed underwriting, early claims also contribute to a high rejection rate. DLF Pramerica Life Insurance Co. Ltd, which launched in 2008, settled only 24% of its claims in FY'12, the lowest in the industry. Further, it refused 17% of its claims and 59% of the claims are pending in FY'12. "Since 59% of our claims are pending, it means they can go either way. But 17% of the claims that we have repudiated are all early claims. During an early claim, the investigation is very thorough because the chances of fraud are the highest," said Sujata Dutta, senior vice-president, DLF Pramerica Life.
What it means for you?
So essentially you are left with two questions. One, are online premiums sustainable? Two, will online policies pay the claims? While it's too early to say if premiums of online term policies are sustainable, there is a good chance that genuine online claims will not be rejected.
Also, with an active redressal mechanism instituted by the regulator and the changing focus of the insurers, there is a good reason to believe that genuine claims will not be rejected.
However, you should also make proper disclosures and make sure that you fill up the proposal form accurately. Also, you should not shirk medical tests. A complete health assessment is needed to underwrite you properly.