Published in Mint on 19th February, 2018.
Mint’s Insurance Conclave 2018 in Mumbai, held on 13 February, saw a discussion on IPOs and changing market trends in the life insurance industry.
The panelists included Amitabh Chaudhry, managing director and chief executive officer, HDFC Standard Life Insurance Co. Ltd; Arijit Basu, managing director and chief executive officer, SBI Life Insurance Co. Ltd; Kapil Mehta, co-founder, SecureNow.in; Puneet Nanda, executive director, ICICI Prudential Life Insurance Co. Ltd; R.M. Vishakha, managing director and chief executive officer, IndiaFirst Life Insurance Co. Ltd; and Sanket Kawatkar, principal and consulting actuary- life insurance, Milliman India Pvt. Ltd. The session was moderated by Monika Halan, consulting editor, Mint.
Monika Halan: The life insurance industry manages Rs25 trillion retail money and the annual premium pipeline is Rs4 trillion or 16% of AUM. The sum assured to GDP ratio is 50% in India; in Malaysia it is 149%, and 270% in the US. Why is insurance penetration so low?
Amitabh Chaudhry: Before 2010, very different kinds of (life insurance) products were being sold and huge incentives were given to distribution channels. Post-2010, the regulator intervened, and has continued to do so. Now they are taking a relook at the whole set of regulations. The current number (insurance penetration) is gradually increasing. After a long time we have products in insurance that are competitive with the other financial asset classes. It has taken the industry time to reach this point as we had our own operating model that we were trying to correct. Also, there is an inflection point where the protection market takes off. Enough studies in various countries show that at a certain level of GDP that happens. India is approaching that number.
Halan: Irdai (Insurance Regulatory and Development Authority of India) had set up a product committee. A line from its report said that if the industry does not sort out some of these issues, the viability of the industry is at risk. Has the committee gone far enough on the question of surrenders?
Puneet Nanda: One of the key issues identified was whether a certain category of products was giving adequate value to the customer. That is where the issue of surrender value came up. Traditional participating products have been in existence for decades. In that era there weren’t any other long-term savings products, and the interest was in very high teens. Even after everything you charged, the customer was getting a reasonable value. Times have changed. Interest rates are low; the investment regulations for these products are conservative—they do not allow significant upside even in terms of beating inflation; and compound this with the fact that disclosure in these products is inadequate.
Halan: In the report, you can see that everybody wanted status quo. Why not be fair to the customer?
R.M. Vishakha: It’s not about not being fair to the customer. It is about the structure of the product itself—the ability to operate a traditional par product—with features that guarantee capital and returns—like a Ulip (unit-linked insurance plan) is just not possible. From a business perspective, the format of a par product does not allow this. Those charges have been incurred and the money is not there for us to refund. It’s about suitability at the time of purchase and suitability during the course of the policy. Make sure the customer does not lose money, but that will not happen by increasing surrenders because that is not feasible under the product structure.
Sanket Kawatkar: High surrender penalties, implicit or explicit, do act as a deterrent for the policyholder from surrendering. The fact that this is not happening has to do with how the policy was sold or mis-sold, or bought or mis-bought. Simply addressing the surrender value scale will not address the problem. There are some protections already built into this kind of a business—maximum expenses that can be charged to the participating fund; shareholders can take out only 10% of the profits from the participating fund; and emerging surrender profits would remain in the fund. We need to bring out better regulations to channelise that money back to the policyholder, as opposed to putting some artificial limits on the surrender value scales.
Arijit Basu: Look at what Irdai has done. After 2010, when the Ulip fiasco happened, and even after that, it realised something needs to be done about participating products also, and all companies refiled their products. If at the end of the day you are not able to renew the account, it means two things: First is that it is not good for the company and your profitability suffers, and the second is that you are damaging your own chances of getting a fresh policy. Companies understand that. There is a clear connect that what is good for a policyholder is also good for profitability. Maybe there is an actuarial issue behind making the people who surrender get very good benefits because insurance is basically a pooling concept.
Halan: Do you think the committee went far enough? On surrender, the recommendations are worse for the policyholder than before as it is talking of a glide path.
Kapil Mehta: When a person buys traditional insurance, she does not fully understand it because it is a complicated product. There needs to be a much easier exit. Who benefits from this surrender profit? The benefit could come to the policyholders who have stayed through the term, or some of the benefits may come to the people who leave along the way. If the situation was that 90% of the people have seen the policy through, then it should be done in a way that you get best returns on maturity. But unfortunately the situation is that a large number will leave along the path.
Halan: Fifth-year persistency is 39%, which means that 61% policies do not get renewed after 5 years. Isn’t it a problem that the industry is manufacturing products which die after 5 years?
Chaudhry: Despite the fact that a majority of the companies said status quo, the committee said we must go beyond this. A suggestion, which I thought was quite radical, was: you pay the first-year premium, and you are covered for the mortality of your life for the entire policy. From the 2nd year, you get your premium back. You mentioned 39% for 5th year persistency, but we have started crossing 55% and 60%. And as this cohort gradually moves through the 6th year and 7th year, you will see these numbers improve.That time is gone when you were living on lapsation profits.
Basu: In the 9th or 10th years, it’s actually not that bad. We don’t disclose it, but we should take a call on that. Those people who stick on, at least on the traditional platform, for at least 5 years, are likely to stay for the entire duration. The company gains if people are persistent. This has started impacting sales also. We don’t give a salesperson credit if the persistency track record is bad.
Halan: In most of the financial sector, it is really the distribution that wags the industrial tail. How do you solve that?
Nanda: One of the reasons is that a particular product or product category gets sold by the distributor because she is going to make more money. Some of us have managed to improve our persistency considerably because we have aligned distributor interest to the interest of the consumer. And that is how it should be. We have to change distribution, the product structure, and the way we train people.
Halan: This is the first report where the insurance industry has recognised that there is a problem, and change will come after that. But when?
Vishakha: The assumption is that if the customer does not continue after the fifth year, she loses money. We need to challenge that assumption first. In traditional, the policy gets a paid-up value after 3 years. On the basis of this, if she stays, she gets back the money she paid. She does not lose money. The problem is when people do not pay at least three premiums.
Kawatkar: The surrendering policy holder will always get a deal that is worse than what a maturing policyholder will get. The question is till what degree. The money is pooled and we have to decide how much to give to the surrendering policyholders by taking it out from maturing policyholders. In my mind, it is a distribution issue. We have to link the distributors’ compensation with the persistency of the business to the extent possible, or get the regulations changed.
Mehta: There are three types of models that are there in the market (for distribution) and one of the issues is that there is limited flexibility in setting incentives for distribution. For example, if I were to distribute a health insurance product, my income as a distributor would be 17.5% of the premium, and it continues lifelong. So, as a distributor also it makes sense to make a good sale and ensure renewal. There are provisions in the law that make sure it happens. Unfortunately, in life insurance in India, perhaps because of regulatory reasons, it is upfront and not so valuable for the distributor in the long term to keep the policy going.
Chaudhry: We are not asking for regulations on what it (commission) should be. We are asking for flexibility, depending on the kind of distributor. Right now, there is a huge gap between what you can give upfront and at renewal. There is another suggestion there. We must appreciate the fact that there are many large distributors out there who have a huge amount of distributed power. Distributors can take advantage of the desperation that some of the smaller companies feel. The regulator should be tough with some of these distributors. Going to the distributor and saying that I will not pay more, is not going to work, because there are others who are willing to find ways to make this payment.
Halan: Arijit, with a bank partner, sales are easier. So why is it difficult for SBI Life to implement these changes without waiting for regulatory changes?
Basu: I am with Amitabh when he says give us more flexibility. Look at Ulips. The first-year commissions are down to below 10% because of the cap on what the company can take. Renewal premiums are lower, but there is a convergence. The best persistency is in Ulips. In India, this (individual agents) is one of the largest independent sales force. Only some of these agents actually run a business; for most of them incentives are required. The concern is whether individual agents have a viable model.
Vishakha: Nobody benefits from low persistency. If the company is not benefiting then beyond a point it will not be comfortable with the distributor benefiting. Any expense overrun has to be funded by shareholders. So there is enough and more discipline within the company to make sure that persistency is high. For distributors, you need to have a process. Premiums have come in but what sort of checks do you have to ensure that the customer is persistent. There are many ways which one can use, starting from simple flexibility of premium. Why does a policy lapse if the premium is not paid in 3 months? Why not have a premium holiday? We need to start thinking differently.
Nanda: In India, 75-80% of the earning population is self-employed. By definition they will have an issue with regular payment. Even those who stay for the entire policy term, will perhaps not get returns that beat inflation. We have to tackle the issue on all fronts—product design, distribution, training and incentivisation. The best way is for the regulator to say that this is a minimum value that the customer deserves, and within that this is the maximum charge that you can have.
Mehta: As of now one company dominates 70% of the market share. The largest company in the market is also a big contributor to the government. So, to a large extent, the government is driving a lot of these perspectives.
Halan: The one question that all of us have is that finally what is the internal rate of return (IRR)? For the industry what would be that number that we can work with? Finally, this is a financial product.
Nanda: It is partly for the regulator to perhaps mandate and partly for the industry to take certain calls. Some of us do show IRRs in our illustrations for this kind of product. No regulation bars us from doing this. Likewise some of us do give more value in terms of surrender values and charges which is more than what the regulator has set.
Vishakha: Returns are always relative. Let’s take mutual funds. The returns are declared above the benchmark. In a par product, you are giving capital guarantee and every return declared is guaranteed. If you put in some costs and charges for the cost of capital, cost of guarantee, and the cost of the insurance company taking on the risk of financial uncertainty, and then ask what percentage of returns will there be, and take the G-sec rate as a benchmark, and say that the G-sec rate minus this percentage is what the par return is, I would say yes. Post-2014 regulations, for the par products, the reduction in yield for 15 years is 2.25%. This is also about investment returns: is the fund manager investing well or not.
Halan: There is a new regulator coming into the market. What is the one thing you hope it will do?
Kawatkar: Move away from rule-based regulations and come out with principles-based regulations. This will provide flexibility to the industry and also put the onus on it.
Nanda: Define what is good for the customer. Mandate that, and beyond that give flexibility to the industry to design products and compensation models.
Chaudhry: We have worked very hard on the product committee report and I hope the regulator accepts most of it.
Basu: Flexibility, and the ability to give companies that have a good track record in terms of expense of management, their way in designing products, and not look at too structured a way in which product approvals are given.
Mehta: Regulate on market outcomes like persistency or behaviour of product, rather than on inputs on product incentives, or approvals or training.
Vishakha: One, create a niche for life insurance industry. Stop comparison with all unrelated products. Nobody looks at bank fixed deposit rates and asks what is your net interest margin or what is your loan book. Two, create accountability for insurance companies. It is important that insurance companies that are not playing by the rules don’t get away with a fine of Rs5 lakh slapped on them.