"Bajaj Allianz Life Insurance? Doesn't Bajaj manufacture scooters? What does a scooter manufacturer know about insurance? I'd rather go with LIC. At least they know what they're selling!"
Sounds funny, doesn't it? Well, I did happen to overhear this very conversation the other day and it made me realize just how many reservations people have against private insurance companies in India. While most believe the private players are unreliable and may prove to be unsafe investment platforms, many people aren't even aware of the conditions under which these companies have been floated. As a result, Indians often have very negative ideas about the private insurers. The truth, however, is that the private insurance sector is very safe and stable and there is practically no risk involved in investing here.
LIC's monopoly (1956 -1999) and its effects
Life Insurance Corporation of India or LIC, had long been the only insurance company in the country. It was only in the year 2000 that the insurance sector was thrown open to private players. As a result, entire generations grew up on the belief that LIC was synonymous with insurance in India. The notion still lives and so people find it difficult to associate insurance with any other company. This however, doesn't in any way go on to diminish the credibility of the private insurance companies. On the contrary, the private insurance sector is doing very well and in the last 12 years, not a single insurance company has shut office. The sector just keeps growing with more and more financial institutions like ICICI, HDFC, and Kotak Mahindra branching out in the insurance sector
Credibility of private insurance companies, ensured by IRDA
1. SOLVENCY MARGIN
Section 64VA of the 1938 Insurance Act states that every private insurance company must deposit an amount of Rs.150 crores in the RBI under the Insurance Regulatory and Development Authority (IRDA), as solvency margin. This is treated as a safety deposit and would be used to pay off policyholders in case of bankruptcy of the company.
2. MERGER CLAUSE
As per the clauses of the Insurance Act, no private insurance company in India can wind up its business completely. If it cannot sustain its business, it has to merge with another company and bail itself out of the crisis. This clause has been included to protect the policyholders from losing their investments in case a company decides to wind its business up.
So with these two clauses, the IRDA has ensured that buying insurance from private companies is a completely safe process. The biggest fear in the minds of people usually is that they will lose their money is the company shuts shop. But these strict IRDA regulations eliminates every last element of risk and make private insurance very safe.
There are over 50 private insurance companies in India and most of them have great products. There is no harm in buying insurance from LIC, but it would always be wise to consider all the options when so many are available. Do not get swayed by prejudices. The facts are in front of you and you can see for yourself that the private insurance sector is quite safe in India. So make a wise purchase and you will surely get the most out of your insurance policy.
The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal
For more articles by Deepak Yohannan, please visit MyInsuranceClub.com
You may write to the author at Deepak@myinsuranceclub.com