Investment products came first, and then protection

Published in Mint on 3rd September, 2014,Written by Kapil Mehta

Eight years ago, I interviewed with a US insurer to build their business in India. Walking into their headquarters was an eye opener. Every person I met had spent two to three decades in insurance and with one company. Insurance is a business that demands a long-term perspective. Decisions taken today can impact business decades later as insurances mature. Most respected insurers are 100-year-old institutions. Last month, I reached out to six experienced international executives whom I have met over the years and asked them to list international events or trends that have shaped insurance. This is an amazing group. Their cumulative experience of over 170 years spans every continent and they have directly led insurance businesses in over 40 countries. I have synthesized their responses and inferred lessons for India.
The shift from protection-oriented insurance to investment products has fundamentally altered the industry. Most insurers began their existence selling protection and savings. That is a much harder sell than investment. Over the past two decades, insurers have introduced investment products such as variable universal life, unit-linked insurance plans (Ulips) and variable annuities. This has driven growth but also profoundly altered the industry. Now, insurers are exposed to investment cycles that previously left them unaffected. When markets fall, customers lose money and are dissatisfied because they expect stability from insurers.
Unfortunately, India’s development has been diametrically opposite. We first introduced investment products and are now gradually moving to protection. This makes building capability to sell protection much more difficult. The solution lies in creating large groups that can be provided protection cover cost-effectively. The government scheme where Rs.30,000 term cover is given to new account holders is one such example. A trust I know covers over 1,000 of its members with such insurance. Many more groups are possible if insurers actively seek out these opportunities.
Over the past two decades, direct distribution has sparkled. Estimates suggest that 40% of insurance contracts are sold directly to customers without an intermediary. Direct distribution has effectively lowered insurance costs. However, the flipside is that the channel is ineffective for non-commodity, complicated products. High quality tied agents are best for these products but the number of such agents in many markets is reducing. According to ReMark, a global insurance direct-marketing firm, this has led to a drop in life insurance penetration among younger customers in several developed markets. If not managed well, direct distribution can result in people buying products without understanding detailed terms or buying less insurance than they ought to have.
The Internet is the most transformational direct distribution medium. Regulations play a key role in its development. New electronic transaction rules introduced across the world during the past two decades have spurred insurance e-commerce.
Direct distribution in India is nascent and should be encouraged. Payment processes, physical documentation and signature requirements, verification processes and more need substantial overhaul and simplification.
The opening up of Asian markets has fuelled growth for established international insurers. According to reinsurer Swiss Re, 10 years ago, countries belonging to Organisation for Economic Co-operation and Development group accounted for 91% of insurance premiums. Today, this is 81%. China and India are key to international insurers but both countries have been protectionist in a way that is detrimental to local industry development. Therein lies an opportunity. When the Insurance Bill goes through Parliament, there will be renewed interest in India. International insurers are likely to develop direct distribution and protection products.
Internationally, capital requirements are risk-based and increasingly stringent. This is good because capital is linked more closely to specific risks, and insurers must have stronger internal processes and well thought out product design, reinsurance and investment. The downside is that even though insurers do not generate the same systemic risk as banks, they are subject to similar regulatory control.
In India, our solvency requirements are not directly risk-based. We must shift to this risk-based approach. In the short term, capital requirements may actually come down but in the long term we will have a more systematic methodology to determine capital needs.
Catastrophes are more expensive, severe and common. According to Swiss Re, in 1980, the 10-year average of insured losses was about $10 billion. In 2013, it was $60 billion. Over 80% of these losses are natural disasters but man-made catastrophes such as terrorism are also on the rise. We do not sense this impact in India yet because our insurance penetration is very low. In fact, this puts greater responsibility on the government to provide cover for large-scale catastrophes.
Longevity in international markets is increasing fast and people have not provided for retirement. Consumers as well as actuaries consistently underestimate longevity. Because people live longer, the incidence of critical illness has gone up. So, retirement and elderly healthcare products are a focus across the world. In India, lack of retirement planning has been a perennial issue.
I meet so many elderly people who cannot pay for their daily needs and are forced to depend upon others. Large pension schemes are un-funded. Annuities are conservatively priced and taxed. Retirees have to use up their capital to survive.
Social media is forcing improvements in customer service. Anybody can post their views on an insurer and be read by thousands. The court of public opinion is uncompromising and forcing better service. This trend is also visible in India. Browse through social media and you will find hundreds of specific customer complaints. Often, insurers resolve issues on the social media platform itself. The days of prohibiting agents from posting about a company have gone. Insurers will need to be active social media participants to resolve customer issues.
The group that sent me their observations provided valuable insight. India was the last big insurance market in the world to open up. History is replete with late bloomers who left a mark. That opportunity is still open for us.

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