General Insurance

Published in Asia Insurance Review.

In 2019 the Indian government permitted 100% foreign investment in insurance intermediary companies. Has this move been useful and productive for them? Asia Insurance Review spoke with SecureNow’s Mr Kapil Mehta to understand the implications of the change.

The insurer and the insured are the two main components of insurance; however, insurance is a complex process that often involves intermediaries that are primarily facilitators and not actual sellers of insurance. They act as a bridge between the insurer and the end customer and help sales and marketing, processing of claims and much more. As per the Insurance Regulatory and Development Authority of India (IRDAI), insurance intermediaries include agents, brokers, surveyors and loss-assessors, third party administrators, web aggregators, insurance repositories, insurance marketing firms and insurance self-network platforms.

Limit of foreign investment enhanced

In 2019 IRDAI notified the Indian Insurance Companies (Foreign Investment) Amendment Rules 2019 which effectively allow 100% foreign investment in insurance intermediaries.

SecureNow co-founder Kapil Mehta said, “Insurance intermediaries in India are so much smaller than their counterparts overseas. Consider insurance brokers – we (brokers) account for about 30% of the total general insurance sales in the country today, a substantial figure, however, this is much lower than overseas insurance markets where brokers distribute over 50% of the total business. Those insurance markets are also substantially larger than our markets.”

Smaller in India

Mr Mehta said, “Here, most intermediaries are smaller than the insurers whose products they sell. In
developed markets it is not unusual for an intermediary to be larger than the insurance carriers themselves.”

Speaking about why this should be, Mr Mehta said there are several reasons why intermediaries are sub-scale and list the top four as, “insufficient geographic penetration with existing traditional models, lack of patient capital to experiment with distribution, weak value proposition to attract and retain experienced executives, and finally a compensation structure that does not reward sales to lower income groups and small businesses.”

The insurance industry has always said that there is a large gap between the technology used by the insurers
and the intermediaries. The industry hopes that with the complete relaxation in foreign investment, the
advent of technology and advanced digital platforms will be facilitated.

Mr Mehta said, “The impact of an increase in the foreign investment limits for intermediaries to 100%
has yet to be seen. It takes four to five years after such a fundamental policy change to see the full impact.
However, even at this early stage, it is possible to determine where changes are most likely.”

A lot can happen
“Increased foreign investment will help expand traditional distribution,” he said. “Most intermediaries
today are in the larger cities. These still have considerable growth potential but there is an equally big
distribution requirement in tier II and III towns.”

Thanks to COVID-19, there is a greater awareness about insurance in India, especially in the tier II and tier
III cities. The intermediary network in these areas is not very extensive due to various factors including lack
of capital.

“More capital will help these businesses (intermediaries) move deeper into the country. The deeper
one goes, the longer the gestation for a business to breakeven and this is where capital can help,” he said.

“Enhanced foreign investment will allow for experimental distribution ideas,” Mr Mehta said. “The failure
rate of these new models is high and hence, a capital cushion encourages innovation. I don’t mean to suggest
that it is okay to lose money in experiments but taking some amount of risk is necessary to work
out models that can make a big difference.”

In the developed markets some of the intermediaries being bigger with better financial muscle is largely due
to impact of investment made, gives them that much more flexibility to experiment and expand.

“Overseas there are fully online commercial insurance distributors, companies selling just liability and
home insurance online, technology platforms that help agents recommend the right products and
many more,” said Mr Mehta.

Becoming more relevant
He said early investments in Indian intermediaries are most likely to be from the private equity funds. Internationally, these funds are major owners of insurance intermediaries. Companies already
operating in insurance, colloquially called ‘strategics’, will also enter as the markets mature somewhat and
some companies build scale.

“Finally, more capital will strengthen an intermediary’s ability to attract more experienced and stable talent with wealth creation opportunities. This is a bugbear today. People spend a year or two at one distributor before
moving to others. Consequently, there is a sameness in distribution across intermediaries. Committed,
long-term talent is necessary for intermediaries to scale,” he said.

The pandemic has brought about a fundamental change in insurance buying in India. It has acted as a
catalyst and has increased insurance awareness, especially of health insurance. According to a survey by
Max Bupa Health Insurance, prior to COVID-19, only 10% of Indians were interested in buying health insurance
but now 71% of people see health insurance as a necessity.

“Health insurance is an area where there is considerable friction between hospitals, TPAs and insurers. Many issues such as delayed discharges, differences in determination of fair charges are a result of such friction.

Intermediaries that are neutral can provide solutions to manage some of these processes better. They have the ability to work at the micro-level to address them. With more capital, intermediaries could develop technology-based solutions for some of these areas.”

COVID-19 induced two major changes

Mr Mehta said, “COVID-19 has brought about two major changes in the insurance scene in the country. One change is digitisation of insurance buying and servicing. But building an end-to-end digital business requires upfront investments as initial marketing and technology costs are high.

“The second change is that traditional capital sources are drying up and it is becoming difficult for smaller companies scaling up to get adequate capital. Increased limits of foreign investments could help in both these areas and provide the deep pockets needed to build businesses. However, I do want to underscore the point that foreign investment is but one leg to build a successful intermediary platform for the Indian insurance industry.

Supporting regulatory framework, exceptional talent and patience are equally important.”

“Another change that I expect to see is intermediaries working in many more parts of insurance. Ideally, as intermediaries scale up, we should be much more active in claims management and even in underwriting decisions. Overseas several intermediaries are given the underwriting pen, subject to certain risk controls. This allows intermediaries to move faster and cuts down selling time considerably. Some intermediaries overseas are allowed to settle claims within limits. I would expect to see some of these policyholder friendly practices emerge
in India as well,” said Mr Mehta.