Imagine this: You diligently pay your insurance premiums, believing you’re securing your future. Meanwhile, insurance companies are turning your money into massive profits. Ever wondered how these firms operate behind the scenes? Let’s uncover the workings of insurance companies in India, their strategies, and how they impact your financial journey.
What is insurance?
At its core, insurance is a financial agreement between you and an insurance company. You pay regular premiums, and in return, the company promises to provide financial protection or compensation for specific risks—like health emergencies, accidents, or property damage. The idea is simple: mitigate financial losses by transferring risk to the insurer.
We had recently written a feature about why billionaires invest in watches, real estate, yachts and more. You will be surprised to know about it?
How do insurance companies operate?
Insurance companies in India function by pooling risk. Here’s a step-by-step breakdown of their operation:
- Premium collection: Companies collect regular premiums from policyholders.
- Risk assessment: Based on your age, lifestyle, and health, insurers evaluate the likelihood of a claim.
- Investments: Premiums are invested in financial markets—stocks, bonds, and real estate—to generate returns.
- Claims settlement: When a policyholder files a claim, the company assesses its validity and pays out. The profit lies in the gap between premium collections and claim payouts.
How they use your money to make more money
Insurance companies don’t just sit on the premiums collected. They deploy sophisticated investment strategies to multiply their wealth:
- Investments in safe assets: A significant portion of premiums is invested in government bonds and fixed deposits, ensuring steady returns.
- Equity and mutual funds: Companies take calculated risks by investing in high-yield financial instruments.
- Real estate: Many insurers hold vast property portfolios, leveraging market appreciation.
While your returns on insurance-linked savings plans (like ULIPs) are limited, companies reap substantial profits from these diversified investments.
Risk-taking: Their superpower, your limitation
Insurance firms thrive on their ability to take calculated risks. With access to financial experts and large-scale resources, they can weather market volatility and economic downturns. In contrast, individual policyholders lack the same risk tolerance or market expertise, making insurance a necessary safeguard but not a wealth-building tool.
Impact on professional growth
For professionals, insurance serves as a safety net, reducing the financial stress of unforeseen events. However, the dependency on insurance also creates a false sense of security. Instead of actively building wealth through diverse investments or entrepreneurial ventures, individuals often settle for the limited returns offered by traditional insurance policies. This can stagnate both financial growth and career mobility, as people stick to stable jobs solely for the associated benefits.
How insurance affects financial growth
Insurance can either safeguard or limit your financial growth, depending on how it’s used:
- Protection against catastrophic losses: It shields you from debilitating financial setbacks, such as medical emergencies or property damage.
- Limited returns on investment: Policies like endowment plans or ULIPs often yield lower returns compared to direct investments in mutual funds or equities.
- Reduced liquidity: Regular premium payments reduce the cash available for other high-return investments.
Who uses insurance in India?
Insurance is utilized by a wide range of people:
- Individuals: Health, life, and vehicle insurance are common among salaried and self-employed individuals.
- Businesses: Companies insure their assets, employees, and operations to mitigate risks.
- Government entities: Public projects and infrastructure developments often involve comprehensive insurance coverage.
Who should use insurance?
Insurance is essential for anyone seeking financial protection against risks. However, its role should be limited to risk management, not wealth creation. Young professionals, middle-class families, and business owners should prioritize insurance for safety while exploring other avenues for long-term wealth growth.
Countries where insurance thrives
Globally, the insurance industry is a powerhouse, with the following countries leading in market size and adoption:
- United States: The world’s largest insurance market, with widespread use across all sectors.
- China: Rapid economic growth has driven demand for life and health insurance.
- India: A burgeoning middle class and increasing awareness have led to significant growth in the insurance sector.
- Japan and Germany: Both countries have well-established insurance markets with high penetration rates.
What does insurance really do?
Insurance provides financial security by absorbing risks you can’t bear alone. Whether it’s safeguarding your health, home, or vehicle, insurance ensures that unexpected events don’t derail your financial stability. However, its role in wealth-building is minimal and often misunderstood.
Who does insurance help?
Insurance primarily benefits:
- Policyholders: By providing a safety net against financial shocks.
- Employers: Through group policies that attract and retain employees.
- Financial institutions: By reducing credit risk when issuing loans.
- The economy: By stabilizing financial markets and encouraging long-term investments.
Can you make money with insurance?
While insurance is not designed for wealth creation, certain policies offer modest returns:
- ULIPs (Unit Linked Insurance Plans): These combine investment and insurance, providing market-linked returns.
- Endowment plans: Offer a lump sum at maturity, though the returns are often lower than other investments.
However, the returns are negligible compared to equity or mutual fund investments, and the high fees associated with insurance products often erode profits.
Latest figures on claims and policies in India
To understand the scale of the insurance industry in India, consider these recent statistics:
- Life Insurance Corporation of India (LIC): In the financial year 2023, LIC received over 0.9 million individual death claims. Among private insurers, SBI Life received over 36,000 death claims during the same period.
- Claim settlement ratios: LIC alone settled over 922,000 claims during 2022-23, while the private insurance sector paid 154,000 claims during the same period.
- Insurance penetration: Despite efforts to increase coverage, the insurance penetration rate in India slipped from 4.2% in 2022 to 4.0% in 2023.
- Awareness levels: A 2023 survey indicated that 85% of respondents in India were aware of life insurance, reflecting growing awareness but also highlighting the gap in actual policy ownership.
These figures illustrate the extensive reach of insurance companies in India and their significant role in the financial ecosystem.
What we think about it
Don’t mistake insurance for wealth creation. Insurance is a vital tool for managing risks, offering financial security, and protecting against unforeseen circumstances. But it’s not a shortcut to building wealth. While companies leverage your premiums to generate massive returns, policyholders often settle for limited payouts and subpar returns. The key is to strike a balance: use insurance to safeguard your financial base but diversify into other investment avenues to achieve true financial growth. Don’t let the illusion of security trap you in mediocrity; instead, take control of your financial
About The Author
