A five-point agenda to speed up insurance growth
27 Jan, 2014 11:11 AM
Industry can draw lessons from how the telecom sector has evolved in a short time.

The health of the life insurance industry in a country is usually depicted through insurance penetration as a percentage of GDP. In India life insurance penetration has increased from below 2 per cent in 2001 to 4.6 per cent in 2010 and then dropped to 3.5 per cent last year. In a way the government’s decision to open up the sector for private and foreign participation was justified by doubling of penetration within a decade.

But then there has been a drop. Is this temporary or will life insurance industry continue to grow in future? The question can also be extended – if the industry is to grow, how and from where will the growth be achieved?

The dynamics and landscape of the life insurance sector have changed dramatically with a series of regulatory changes in 2010 and 2013, mainly on the products and distribution side. While these changes have brought in a fresh set of challenges that the industry is still coming to terms with, therein also lies tremendous opportunity and potential as well going forward.

The macroeconomic indicators look strong and promising and India’s growth story is still intact. These regulations have forced the players to have a serious re-think on their business strategy, product mix, distribution models and expenses to perform in an economy where financial literacy is still very low.

To achieve sustainable performance and create value for all stakeholders – customer, distributor and shareholders - the life insurers need to fix their agency operating model, build long-term strategic non-agency partnerships, invest and develop alternative channels and innovative products, and most importantly better incorporate a customer-centric operating model with control on expenses.

Let us try and compare the story with other sector that was opened up for example telecom. Initially the industry invested heavily in setting up infrastructure and expanding its reach. The telecom industry grew exponentially till the density was among highest in the world. Then competition set in with several new players entering the fray. This resulted in lowering of tariffs and providing better value to customer.

The similarities end there, but the life insurance industry can draw lessons from how the telecom sector evolved in a short span and how they increased penetration. In life insurance, the value to customer is not easily visible as in a physical product. The lowering of charges and providing better value to customer was driven through regulatory changes brought in by Irda.

For an outsider it may look like a plethora of changes but all with a single objective of providing better value to customer. This has led to short term pain witnessed by the industry in trying to adjust the business model, the distribution model and internal cost to operate in new environment.

Unlike a physical product like telecom, insurance is not bought but sold. Customers don’t wake up thinking that today they need to finalise their retirement planning or their children’s education plans. This brings to basic fact that penetration of insurance is closely linked to the ability to set up and adequately remunerate the distribution network.

Given the “sell” nature of product and the need to have distribution network the products had the “upfronting” element of these costs. When the value of the product is seen in short term, it generally comes out as inferior from an investment return point of view. But like retirement planning or education planning, life insurance is essentially a long term product and the value should and can only be compared over the longer term.

In the short term, if a customer cancels a mobile plan, he does not expect a refund for the unused quota of number of SMSes or calls that hasn’t been used. But in life insurance, if the customer wants to cancel a plan midway, the expectation is that the entire premium paid should be refunded.

Essentially, a product should be sold more for its protection element rather than only the investment element. This leads to the monumental question of customer education and financial literacy in general. Other countries have made regulations to encourage financial services companies to invest in customer education programmes through tax incentives on the expenses. The proposed Companies Act requires 2.5 per cent of profits to be invested for CSR activities. Could we imagine the regulator allowing consumer education programmes to be financed through the proposed budgets of the CSR activities?

The macroeconomic environment remains conducive for sustained growth of the life insurance sector. Comparatively higher GDP growth (although declining in recent past), very high savings rate (mid-30s), high proportion of financial savings, demographic dividend from younger population remains the fundamental factors, encouraging the sector to grow in future. How should this opportunity be realised?

One learning from the telecom industry is the pre-paid plans by mobile operators. Simplifying the product and distributing for the rural population shall drive the growth for the future.

The insurance regulator is encouraging the products under micro-insurance regulations and very recently launched the common service centres (CSC) model. This could provide access to over 130,000 centres. The ability to connect them to insurance companies’ servers electronically and service policyholders is a tremendous opportunity.

Secondly, the issue of collection of money and payment of claims currently rides on the banking backbone. Some markets have experimented successfully with mobile wallet. Thirdly, the regulator recently directed banks to reach customers as brokers.

Fourthly, for cost optimisation, if the telecom industry could envisage common tower infrastructure, can the insurance industry not consider the possibility of common branches where the customers could pay renewal premiums. Finally the digital channel in the digital age. This provides a cost-effective mechanism to reach and engage customers. The ability of the insurance sector to be able to engage with this set of customers will be key to the future growth potential.
Source : Financial Chronicle

© Copyright Loyal Insurance Brokers Ltd 2008. License code no. DB 328/05. All Rights Reserved. Insurance is subject matter of Solicitation.