When you buy a car it is quite a simple process. There is a base prize and for add-ons like a stereo system, cushioned seats and the rest, you pay extra. But if the carmaker decides that the seats, tyres and the steering as add-ons, would it not be a strange situation?
Insurance is a field where add-ons have been in vogue for a long time. But the number has been increasing and has reached an extent where it doesn’t work in the interest of the policyholder. In fact, it works against the interest of them, making the already complicated insurance policy with its numerous exceptions and conditions, even more difficult to appreciate.
Add-ons are special clauses which add to the risks covered or provide certain additional benefits. They can be of two types. One type of add-ons are those where it is different from the main policy and is given as a facility to the insured. For instance, in a life insurance policy there is a provision for covering critical illnesses. They have listed a certain number of major illnesses like cancer, heart ailments etc., which are life threatening and expensive to treat. This is sought to be covered as an addition to the life insurance policy by payment of extra premium. Only in the event of the insured contracting any of the specified illnesses would the cover operate and the insured would be paid a claim. Similarly, on the death of the assured, only the sum assured as per the policy would be paid. This critical illness is different from life insurance and is actually health insurance. But to take care of the long-term interest of policyholders this additional coverage is given by charging extra premium.
Would the key be a part too?
Another example of an add-on cover is in motor insurance. The key of the vehicle is an essential and integral part. Nowadays the cost of a duplicate key is very high and depending on the model of the car it could range from a few thousands to even lakhs. It is a far cry from those days when a duplicate key could be prepared by a key maker for a small amount and the owner could continue using the vehicle without trouble. The key is an absolute need to enter a car. Ideally it should also be taken as a loss under the policy and claim must be paid. However, this is not what happens. Many insurance companies have started covering keys as an add-on cover and charge separate premium for it. How can this be justified?
Consumables like the various types of oils used in the vehicles, were considered as exclusions in the motor insurance policy. Now companies are coming with add-ons which cover the consumables in the event of a loss. As long as it was considered to be an exclusion, the matter was different. But once insurance companies decide to include this amount as an add-on and not as part of the basic coverage, then it needs to be justified.
Can exclusions become add-ons?
Likewise, insurance companies have been taking a stand that engine damage due to entry of water is not payable under the policy. This has been a common case in the recent past due to floods across the country. Imagine a situation where the vehicle is driven through a road that is fast getting flooded; Water enters, the engine stops. There is traffic all around. What would be the natural reaction? Of course, to try and start the engine. As soon as this attempt is made, the engine seizes. This is not well known to many drivers. Insurers have found an opportunity and an add-on cover has been devised. The ideal thing would have been to include it in the basic cover itself and premium adjusted for it, if required.
There has to be a clear-cut guideline on what could be an add-on cover and what should not be. Here the regulator has a major role to play. Basically anything, which should be a part of the policy coverage or which is an exclusion in the present policy wordings, but could become a part of the coverage should not be an add-on. The insurance company could very well increase the premium for such items.
As it is, many of these add-ons are not given free, but an additional premium is charged to cover that risk. So conceptually the insurance company has nothing against covering that aspect for an additional premium. So why not include it in the policy coverage itself and load the premium accordingly so that the insured is not taken by surprise at the time of a claim?
Insurance is trust-based
The insurance industry boasts of hundreds of policies and many more add-ons. In fact, for some of the add-ons, additional premium also is not charged. These are given as free covers as part of marketing initiatives. Insurance should never be driven purely by marketing considerations alone. There is a lot of trust element involved. The trust is not merely on the cover but also on the belief that they are fully insured against a loss. There must not be any ambiguity in this regard.
Clarity will help in awareness creation
There is a basic product which is kept at a price that is affordable by many. Once having made up their minds to go in for the product, the customer would find an array of products which can be taken for prices which are attractive and apparently not very high in comparison to the price of the product. For instance, if a pizza costs Rs 400, on having decided to have it, there is every likelihood that one may go in for additional toppings. The final bill may then come to about Rs 600. If this was price quoted right in the beginning, then there is every chance that the customer may look at other options. This strategy pushes up the cost of the product without the customer realising it.
Discourages insurance buyers…
But there is a difference between an insurance policy and a pizza. An insurance policy more often than not, remains unread by the policy holder. It is an attitudinal problem and there are many causes for it. Second, customers in India feel that insurance is an unnecessary expense and therefore try to minimise their cost without realising its implications. So, they may not go in for the add-on’s even if presented to them. Third, customers would get to know of what is left out of the coverage and its impact, only at the time of a claim. At this stage customers would feel cheated and their belief in insurance and it’s benefits would go down. Certainly not a good prospect for an industry which is struggling to increase penetration.
The immediate need to simplify insurance policies and operations is of paramount significance to both the industry as well as the customers. The policies which are already complicated to understand should not be further complicated by these add-ons. The regulator must step in and address this. If insurance has to spread to all, one of the essential elements is to simplify it.
