10 Nov 2014

Insurance No Substitute to Social Security - Unconditional Insurance

All about Insurance
Introduction  Govt Responsibility 

Introduction:In the name of Economic Reforms almost whole of Indian Economy including Banking, Insurance and FDI in retails is thrown open to the Multinational Companies.I am going to discuss only the Insurance Sector as more and more Companies from all over the world are offering are spreading their wings in India.

Govt Responsibility : An ordinary citizen is not aware of the net worth of the Insurer/underwriter. What will happen to the Insured if Insurer/Underwriter goes Bankrupt.Govt. Responsibility of the Insurance Regulatory Authority of India (IRDA) is to assess the Net Worth of the Insurer so that the ordinary citizens are not cheated by unscrupulous Insurance Companies.

Preface: Actually there are millions and millions of Insurable Persons and Assets whereas Claim Ratio is very Low. Insurance Companies collect Crores of Rupees from the public whereas the Claim Amount to total Insurance Premium is very low.What happens to the Huge Insurance Premium collected over and above the Claims Paid. IRDA must regulate the surplus funds in such a way that the ultimate insured persons get the claim UNCONDITIONALLY. Insurance Companies be asked to ensure the fulfillment of all the conditions before issuing the Policy and thereafter Insurance Companies must not hesitate in paying the claim amount. I am of the opinion that all negative clauses in vernacular language should be read out to the Insured and thereafter no ifs and what's.
Now take the Case of Bollywood Comedy Movie OMG (Oh My God): (See Movie:)


In the movie the producer/director has given the message that Insurance Policies also cover the Damages caused due to the "Act of God". In conveying the message by the Highest Court of Law of the Land - wrong  message has gone to the masses that they need not worry about Earthquakes, Tsunamis,Floods , Landslides, Nuclear Disasters and unforeseen Catastrophe.The Bollywood Comedy Movie has been used as a medium of advertisement to benefit such Insurance Companies as Public has been made to believe contrary to the Law of the Land . I urge upon the Judiciary in India to pass very clear strictures against the Producer/Director of the otherwise very Good Comedy as It is felt that the Movie has served the marketing cause of the Insurance Companies - so far unknown to the Indian Masses. Govt. through IRDA, Judiciary and all the Insurance Companies must come out clear
cut guidelines - whether the Court Verdict played/shown in the movie will hold good in Real Life also.

Welfare Schemes/Social Security is better option to Insurance schemes:
To be more clear about the Insurance Concepts - I also discuss here under two  practical cases followed by most of the Nationalized Banks in India. As everybody know Agricultural Financing is a Thrust Area under Priority Sector Lending in India and Tractors and Agricultural Implements (financed by banks) were insured by the Insurance Companies and Incidence of Claim was very low as compared to the premiums collected as Tractors were used to plough the fields. For years and years say 1969 to 1990 the farmers were made to pay hefty premiums for insuring the Tractors with no benefit at all .What happened to the premium money so collected. Insurance Companies have no right to retain that Trust Money as their Profits. Based on such feed backs a leading Bank, Punjab National Bank took a bold step to do away with Comprehensive Insurance of Tractors so as to save the farmers' community from unnecessary insurance costs and PNB set up a Tractor Welfare Fund  and small contribution was taken from the farmer as under :

INSURANCE : The tractor borrowers who have opted for PNB Farmers’ Welfare Fund Scheme are required to get their tractor and matching implements insured against “Liability”(third party) under the Insurance Act to get insurance coverage.

Subscription will be recovered from the accounts of borrowers who give their consent to opt for PNB Farmers Welfare Fund Scheme. The structure of fee is as under :-
a) Rs.800/- : for 12 months of calendar year.
b) Rs.400/- : for less than 6 months in a calendar year.
This move on the part of PNB was well received and followed by other. Bank used to pay claims out of meager FUND collected and the scheme is a great success - but what happened to the Insurance Premiums collected by the Insurance Companies when there were negligible claims. This amount must have been acquired by Govt. or IRDA as a future protection fund of the insured if the Insurer goes Bankrupt or moves for liquidation.

Similarly there was one Guarantee Scheme(in 1990)by DICGC which Guarantees payment to the Depositors within limitations in case a Bank fails in its obligations.This Deposit Insurance Credit Guarantee Corporation also used to Guarantee payment to the Banks in case Small Scale Industries defaulted and failed to pay their obligations. Hefty fee of 2.5% was charged on the sanctioned or availed amount of credit whichever was more and it was taxing expenditure to be born by SSI's. The Guarantee Fee structure stipulated that the cost will be borne in such a way that Interest Cost + G.Fee cost to the SSI not to exceed 19.5% p.a. that is to say that a customer with rating A+ (with roi @17.00% had to bear the cost of G.Fee) and in case of other Customer with C Rating ( with already roi 19.5%) the guarantee fee was to be borne by the Bank. NOW the question was raised by the A+ Very Good Borrowers that we will not follow financial discipline - slip to C category - at no extra cost.As such Protection by Insurance or Guarantee Scheme needs strict control and the accounts of Insurance Companies, their investments - diversion of funds to their personal interests - needs to be thoroughly kept under regulatory authority of Govt. of India.

Government must encourage COMPLIANCE and discourage AVOIDANCE as willing compliance will yield very Good Results and Lower Fiscal Deficit if Fiscal Structure is completely reformed and Indian Economy moves faster to Cashless Society and all financial transactions relating to Reality Business etc are made through Online Transactions. To implement this we immediately need Demonetization of Currency as was done by Late Prime Minister of India - Sh. Morarji Desai in 1977 .

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