Insurance hits and misses: IPOs and Commissions

Published in Mint on 26th December 2017.

The three big events of 2017 that will define the year for the insurance sector are: listing of insurance companies, new commission rules for sellers and consumer protection regulations. Here are the details on what happened in this space and what it means for you.

Benefits of listing

ICICI Prudential Life Insurance Co. Ltd went public last year, leading the line of firms that went to the stock market this year. Year 2017 saw insurers, both in life and non-life sectors, tapping the markets. Two life insurance companies—SBI Life Insurance Co. Ltd and HDFC Standard Life Insurance Co. Ltd—and three non-life companies—ICICI Lombard General Insurance Company of India, The New India Assurance Co. Ltd and reinsurer General Insurance Corporation of India—went public this year. Reliance General Insurance Co. Ltd is expected to go public within this financial year.

But how does all this impact you, as a customer of these companies?

“Listing puts greater focus on disclosures and a company is evaluated on all these disclosures,” said K.G. Krishnamoorthy Rao, managing director and chief executive officer, Future Genarali India Insurance Co. Ltd.

“In the case of non-life insurers, so far they have made profits mainly on the back of investment returns and not because of underwriting profits. This gets reflected in the combined ratio that needs to be below 100% for the core insurance business to be profitable. So, insurers will have to focus on strengthening their underwriting because it’s not possible to continue making profits from investment returns alone,” Rao added.

Focus on underwriting would mean focus on pricing the right products, having better operational efficiencies and claims management, Rao said.

Similarly, in the life insurance sector, listing of companies has brought about greater focus on achieving efficiencies. “IPOs give the industry a lot of visibility. Listing demands a greater level of transparency, governance and compliance which is good for the industry,” said Vighnesh Shahane, chief executive officer and whole time director, IDBI Federal Life Insurance Co. Ltd.

Greater transparency and accountability due to listing are long-term positives for policyholders in India.

Commissions

Another big and much-awaited event for the insurance sector was the overhaul of distribution incentives. But contrary to expectations of drastic measures to bring down the already-high commissions, the new regulations increased the overall level by increasing the renewal commissions and allowing for rewards that could be paid over and above the commissions.

Reacting to this move, Kapil Mehta, co-founder of SecureNow.in, said that this will lead to a push for protection plans. “Being low ticket-size plans, an increase in commissions will make it more viable for the distributors to sell pure protection plans and focus on renewals. Also, being high-margin products, insurers will not have to increase the price. However, in the case of bundled plans, it’s not the renewal commission but revamp of product structure that will encourage persistency,” Mehta said.

In the non-life space, the new regulations haven’t altered commissions for health insurance, but there has been an impact on motor insurance. Commissions on the own-damage portion of the motor insurance cover have gone up from 10% to 15%. Additionally, the insurers can now reward distributors.

Some industry experts believe that increasing commissions in motor insurance will ensure better renewals but according to Mehta, given the mandatory nature of motor insurance renewals are not such a concern here.

It needs to be noted here that third-party insurance of motor vehicles is mandatory, while own damage portion of the insurance cover is optional. However, most of the insurers bundle the own-damage and third-party insurance policies and sell them as a comprehensive policy; and most vehicle owners end up buying such comprehensive motor insurance policies.

Change in auto insurance

However, the big change in the motor insurance space is in the guidelines on motor insurance service providers.

These guidelines recognise car dealers as insurance intermediaries. Till now, while auto dealers were able to distribute motor insurance policies, they were not recognised as licensed distributors.

With the new guidelines in place, effectively, the car dealers have been under regulatory purview; by defining their roles, licence requirements and the incentive structure.

This is expected to bring the price of auto insurance policies down, as the insurers will be discouraged from overpaying these dealers. “Payments to car dealers were in the range of 50-75% of the premium. But now regulations have defined the caps on commissions that apply to car dealers, and the General Insurance Council has assumed a watchdog role to make sure that the dealers don’t bargain for higher payouts,” said Mehta. For the insurers, this means a huge saving in costs “but whether these cost (savings) will be passed on to customers remains to be seen,” Mehta added.

Consumer protection

New rules to protect policyholder’s interest were another key highlight of the year. These new rules aim to ensure that the insurers settle the claims on time and that there are well-defined penalties in case of delays.

“The guidelines clearly mention the turnaround time for policy purchases and claim settlement, clear documentation on products coverage and simple policy wordings that will minimise misselling. These guidelines have also given clarity in claims procedures,” added Rao of Future Genarali Insurance.

All these measures will go a long way in winning the trust of consumers, said Shahane of IDBI Federal Life Insurance . “The biggest challenge for the industry is not GDP growth or inflation but winning customers’ trust back and to bridge the trust deficit. The rules for protection of policyholders’ interests are a step in the right direction,” Shahane added.

The regulations, however, failed to address the issue of transparency as they did not clearly specify the kind of information that insurers are needed to share with their customers. But this seems to be on the agenda for the next year.

The report of the committee set up in January 2017, to review the product regulations, is finally in the public domain and better disclosures are on the menu of its recommendations.

Listing of insurance companies will put focus on controlling costs, improving persistency and increasing productivity of the distributors to a large extent. This is good for the customers. Also, with the report of the committee set up to review product regulations, the discourse in the life insurance sector should move towards increasing transparency and reducing exit loads in traditional plans.

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