Public or Private Insurance Company - Where should you buy your Insurance Policy from?

• Introduction
• Difference between a Public and a Private Sector Insurance Company
• Is PSU vs Private anxiety justified? 
• Which insurance company offers better products - Public or Private Insurers?
• Which insurance company provides better services to the customers?
• How different is the claims experience in both these companies?
• So, private or a public insurance company - where should you buy your insurance policy from?

Government or Private? This is one question that crosses our minds every time we need to consume an important product/service - be it getting treatment at a hospital or getting our kids admitted to a school or opening a bank account. On one hand, where the private companies usually offer better experience than their PSU counterparts on account of better technology and process maturity, the government-owned firms are often considered more stable and dependable in the long term. 

It is seen that we prefer private service providers over government ones in education, medicals, travel, etc despite them being expensive. But, the story is different when it comes to insurance. Let’s first understand why it is so - 

Insurance is probably the only product where one pays many years ahead of actual service consumption i.e. claims. For example, in life insurance we pay for 10/15/20 years or more with the belief that the Insurer will pay us back on policy maturity as per promise. Similarly, in health insurance and/or motor insurance, we pay our premiums on time every year against the promise of prompt claims settlement when the insured event happens. So, naturally we would be anxious about our Insurer’s longevity and ability to pay claims when the need arises. That explains why we prefer PSU Insurers over private ones. 

But, is our anxiety justified? Are PSU Insurers really more reliable, trustworthy and stable than their private counterparts? How should one choose between a PSU Insurer and a Private Insurer? 

We’ll learn the answers to all these questions and more, in this article.

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Private insurance companies are those that are owned by private entities or funds, for e.g. Star Health is owned by multiple funds including Safecrop Investments India LLP, WestBridge AIF and investor Rakesh Jhunjhunwala, whereas HDFC Life is owned by HDFC Bank and is also listed on the stock exchange. Just like private banks, these are private insurance companies. 

Public sector insurance companies are those companies that are owned and 100% held by the government, and report to the Ministry of Finance. However, they are not welfare or non-profit companies. They have a goal of making profits, being autonomous and running on their own, self-sufficiently. As a result - they function in a manner very similar to Private insurers. 

For instance, it is easy to assume that public sector companies are more likely to cover someone with serious pre-existing diseases, as they are part of the government. But, this isn’t true. Like their private counterparts, they too can’t cover any and every risk that comes their way and have to ensure they remain profitable. 

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We believe our anxiety stems out of question marks over the longevity of private insurers. It's a common perception that PSUs are here to stay forever whereas the private insurers may shut down if they are not profitable. The other belief is that PSUs will honor our claims without fail whereas the private insurers may refuse some claims in order to stay profitable. 

At Beshak, we know that our anxiety is misplaced. Both PSUs & Private Insurers run as per IRDA regulations including Insurance Act 1938, IRDA Act 1999, etc. IRDA has put in place checks & balances to ensure that all Insurers function prudently, guard policyholders’ money as their own money and remain solvent at all times. The balance sheets and other financial statements of Insurers are audited every year by independent auditors and reports submitted to IRDA. If the solvency margins dip below the mandated levels any year, IRDA takes the necessary action to restore the solvency margins (multiple of assets over liability). 

In fact, PSUs have to act against common business wisdom many times because of interference by GOI. For example, LIC has been used many times to bail out flailing PSUs and/or support GOI’s disinvestment programs by investing in their IPOs. If such investments are done after all financial due diligence, it’s fine. But, a lot of the time, LIC has to invest in such PSUs only to support the GOI. This is against shareholder’s interest and means that the policyholders don’t get enough returns on their savings policies bought from LIC. 

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Generally, Private sector insurers are much more agile and innovative compared to public sector companies. They learn quickly, and innovate on newer products and features constantly, based on consumer needs. Some Private sector companies are partnered with multinational insurance businesses, and bring lessons from global innovations to our country.  Government insurance companies usually play catch up, and are only up to date with newer offerings after a couple of years. 

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In the private sector, services are usually centralised, and have a core service methodology and technology in place. Everything is system-driven, and that can both - move processes smoothly, but also become very rigid at times. There could be simple errors that could easily be solved by human commonsense, but the systems will not allow it. So even if a branch manager wants to solve it, he can’t because he won’t be allowed to make changes in the system. 

Government insurance companies, on the other hand, are decentralised, meaning every branch office has its own way of operating; every branch officer or divisional officer almost acts like a mini entrepreneur. So, some inconsistencies in service quality can creep in - because it depends on the person working on that case. Plus, the service largely depends upon the divisional manager you are interacting with or the regional manager the divisional manager reports to. 

If you come across a good public sector officer, then the interaction with you will be much warmer because he’ll be able to understand and resonate with your problems. In case you come across an officer who is just wasting his time in the organisation, then you would have a very hard time. Overall, the service you receive really depends on the people in that specific branch office. 

So there is a positive side of decentralisation that government insurance companies have but there is an equal negative side too. It all depends on the human that is sitting there. Even if you started dealing with a person who is great but he could get transferred and there could be someone else who will come and he could be terrible. Hence, the chances of services not being good in a public sector company are higher because they are more human dependent. 

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In general insurance, most government insurance companies operate through external parties - they operate through external surveyors for vehicle insurance and TPA (Third-Party Administrator) for health insurance. Whenever such a third party comes into the picture, the experience can get detached. Only when the insurer is very concerned about the experience and can keep tight control over the external party, the TPA or surveyor, will you see good service. The chances of services going bad with an external TPA have been higher than when you’re dealing directly with the insurer. 

With private players, most of the claims service is managed properly because it’s considered a core part of the business. Most private players control their profitability through claims and hence most of them have claims in-house. The entire private company like the underwriting team, claims and all other teams operate as one. As a result, not only are the services much better but the chances of getting a better experience are also much higher. Hence, private players have an edge over government players.

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There is no binary answer to this. It all comes down to your personal preferences. Choose a public sector company if you are looking at buying through an agent and want real human responses. If you prefer system-driven, faster, and efficient services, then purchase the policy from a private player. 

And whichever company you choose, make sure you buy your policy through a good financial advisor or an individual who has committed to a career in financial planning. This is because that person would have a good rapport with the officers and know how to escalate, how to navigate within the organisation, and get the work done.

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Summing up!

Unlike the general notion that private companies are better than government companies, in the insurance sector, both these types of companies almost work in similar ways as both have the same goals and aim to make good profits. So, it all comes down to your preference - if you prefer system-dependent services, choose a private insurance company and if you don’t, choose a public insurance company.

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