How the world looks at insurance

Published in Mint on 8 April 2015, Written by Kapil Mehta
I am glad March is over. Financial year-end is hectic for insurance. People buy life and health insurance to claim their income tax benefits under sections 80C, 80D and other such. Surprisingly, companies also buy most of their insurance in this month. There is no rationale for this because companies have no tax incentives to buy insurance. About a quarter of annual general insurance sales take place on just two days—31 March and 1 April. That’s behind us now. A secret for people having difficulty getting insured, apply in March because that’s when insurers are in a hurry to meet their targets and issue insurance.
March was an interesting insurance month across the world. A fortnight ago, the New Yorker referred to insurance companies as “Godless agents of capitalism”. That set me thinking. The US is the largest, most mature insurance market. Shouldn’t they be more positive on the sector? I dug deeper into the US archives and realized with horror that insurance has been in perpetual damnation.
The American hero of the 1930s was Morris Siegal, an untiring critic of big insurers. Morris hosted a radio show where he decimated endowment products. In one instance, an insurer had sold four policies to an individual while if it had sold one with the same sum assured, the premium would have been much lower. Morris had this corrected and the difference in premiums reimbursed to the policyholder. Morris earned the moniker “Mankind’s greatest gift” and used a combination of logic, threats, precedence and persistence to have insurers amend their mis-sold insurances. Dozens of people would wait outside the studio during his programmes and he never let them down. Given the large number of defective insurance portfolios I see here and the fact that endowment policies are in vogue in India, we need an Indian avatar of Mr. Siegal.
At the other end of the world in Australia, a sophisticated insurance market, and where the Trowbridge report, Retail Life Insurance Advice, was finally released. The report was commissioned by the industry in response to criticism on high lapses. John Trowbridge, a respected former insurance regulator, was asked to provide an independent view of the way forward. The results are remarkable.
The report highlights that about 80% of life insurance in Australia currently has first-year commission of 120% of premium and 10% for each renewal. The report recommends that the maximum commission allowed be 20% each year. This ensures that an adviser has more to gain by having the insurance renewed than replacing with a new one. To soften the impact of lower first-year commission, a second recommendation allows insurers to pay advisers a one-time customer acquisition fee. Finally, the report recommends a three-year implementation plan given the significant change involved.
There are several inferences that we can draw for India from this report. First, insurers should take the lead in addressing industry issues and not wait for the next notification. Regulators and the public at large will appreciate pro-active thinking.
Second, and I have my protective headgear on as I write this, commissions in India are not high. In fact, they are low. Average commission on unit-linked insurance plans (Ulips) is about 10%, and 20-30% on traditional endowment policies. A good agent sells an insurance policy each week with a premium of about Rs.20,000. That means, she will earn about Rs.15,000 a month. That’s a little more than what many readers of this column pay their drivers. Low income attracts poor talent. Insurance buyers look down on agents; agents find the job demeaning and want to leave. A vicious cycle is in place. That’s not the case in the US where so many high-performing agents are of Indian origin. Mr. Patel was one such agent I knew. When he migrated to the US many years ago, Mr. Patel looked up the yellow pages and cold-called fellow Patels to sell insurance. Today, he is highly respected, trusted, sought after and a millionaire. A few years ago, he set up a corporate agency in his hometown in Gujarat to replicate his US experience and provide quality advice. It didn’t work—agent quality was just too poor.
Third, the fundamental issue we have is of commissions being upfront in the first year. After earning 30% in the first year, second-year earnings fall to 5%. So, an agent has little interest in renewals. If, like in Australia, there are level commissions across years, it would ensure alignment with policyholders. The focus would be on building a book of business rather than on selling new policies.
Finally, fundamental changes in regulation need to be debated, adopted and given time to implement. Nobody likes surprises.
Swiss Re released its natural catastrophes and man-made disasters report in 2014. It mentioned that 189 natural catastrophes were recorded in 2014, the highest ever in the past 45 years. Including man-made disasters, there were 336 catastrophic events. But the number of deaths at 12,777 was one of the lowest ever recorded. Early detection and better catastrophe planning has dramatically reduced deaths. Perhaps I can now allow my school going children to read newspapers. I’m always disappointed to read that deaths and damages in India are relatively high but insured losses are negligible compared to those in Europe and the US. Insurance penetration could provide meaningful financial security to poor Indians.
Closer home, international insurers are delighted with the foreign direct investment (FDI) increase approved in Parliament. Of the over 50 insurers in the country, at least half are actively working on raising their stakes to 49%. There should be several FDI announcements in the next few months. Many of the world’s largest insurers are already here but several other smaller and regional companies are also considering an entry.
The Insurance Regulatory and Development Authority of India (Irdai) issued draft guidelines on formation of corporate agencies. There are several good features in the draft, including the introduction of minimum capital and training requirements for corporate agents. My concern, however, is that the supervision of corporate agents seems to be shifting from insurers to Irdai. This is not a good idea. Insurers should be accountable for the conduct of their agents and that responsibility should not get diluted.
Over the next few months, expect a slew of regulations and insurance related announcements in India.