Insurance

The insurance sector is booming in India. Insurance is an interesting risk transfer instrument. You pay premium, and your downside is protected. All because of the law of large numbers. You see historic data, predict how many claims will originate in the next year from population insured, and accordingly charge. Of course, there is an expectation of utmost good-faith from the insured, that they will completely disclose there past (eg. smoking habits while seeking health insurance) and that their behavior won't change after purchasing insurance (unprecedented rash driving post buying auto insurance). And the insurance interest needs to be reasonable, I can't insure Tanushree Dutta's leg and make a fortune if she breaks it (could have been a big speculators market, with the insured becoming victims to mischievious accidents). Insurance is a marriage of customer fear (death, destitution, disease,...) and insurer greed (claims are deeply assessed/dissected and any loophole can lead to a lawsuit).

Every company today is coming out with insurance products (both under the life and general category). There is lots of money to be made. In fact, margins are so high, that the distributors/brokers/agents make, in many cases, 60% of what the customer pays in 1st year. Many insurance cos. are getting into exclusive tieups with Indian banks to tap into their customer base. Surprisingly, the products are becoming so complex, and the customer so uninformed, that he takes his decision usually based on the advise of his banker/wealth-advisor. Once signed, the customer needs to pay for 10 years or more to actually extract something from his/her policy.

The Govt is promoting insurance. Insurance cos. make a steady stream of income and become institutional investors into long term projects (infrastructure etc.). LIC (the age old public sector insurance co.) was in the 90s allowed to invest only upto 15% (up from 0%, i.e. 100% invested in Govt bonds) in the Indian market and today hold significant equity in India's large cap cos. In this promotion by the Govt, insurance purchases/premiums are to a large extent tax exempt, hence becoming a lucrative investment opportunity for some better informed customers. Consider term insurance (pure insurance or mortgage reducing, that Indian's haven't been concerned about till now) with a high life cover. Consider ULIPs (united linked insurance plans) and follow the equity/bond market to invest the earmarked amounts. Stay away from annuities and endowments that are inflexible and full of hidden charges.