The insurance sector plays an important role in the economy. It serves two main functions – ensuring adequate coverage of risks and the realization of assets and liabilities. It can enhance social movement by helping people and households to withstand shocks that might impair their assets and future earning capacities throughout their entire life course. Individual or household growth might be jeopardized by the lack of insurance instruments that enable these concerns to be shifted. Thus, the capacity to get insurance products or services can prove to be the gap between people attaining their aim of social movement or staying economically vulnerable. This blog will provide an insight into the importance of financial inclusion in the Insurance industry. Group health insurance policy
Higher development of the insurance business in the country is necessary for enhanced efficiency of its execution. It will assist maintain a sustainable development track.
First, let’s go through the challenges faced by the Insurance Industry prior to Financial Inclusion.
Challenges
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Accessibility
Customers in outlying areas have to visit many single product distributors to obtain a full range of financial solutions. Agents who provide insurance plans with embedded returns are the most common distributors. Aside from them, insurance firms and AMCs offer services through their own locations and websites. Multi-product distributors, including PBs and SCBs, are accessible via their offices and business correspondents.
The pool of possible clients in online Fintech channels is about 50 million users out of the nation’s 350 million active internet users. This excludes the overwhelming proportion of low-income persons who require offline ways of accessing products. It is thus uncertain to be feasible alternatives for low-income families to acquire goods in the foreseeable future.
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Sign-up via KYC and Payment Transactions Set-up
There are various challenges that the Insurance industry faces regarding customer onboarding via KYC. Some of them include:
- All new purchases require a renewed fresh KYC.
- Substantial opportunity to reduce KYC costs for both the supplier and the client.
- Reusing existing approved KYC is unauthorized (for products regulated by the same regulator and products regulated by many authorities).
- Access to SEBI’s CDSL Ventures Limited – Know Your Customer suppliers are unauthorized.
There are also significant obstacles in establishing payment transactions. Regional differences in the efficiency of ECS facilities, as well as fines for low funds, discourage potential new customers from using auto-debit payment options.
The RBI does not currently allow one-time requirements through UPI 2.0.
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Insurance Mis-selling
Banks marketing Fixed Deposits, ULIPs, and endowment schemes are motivated by competing motives that cannot prohibit employees and business correspondents from participating in abusive and deceptive sales tactics. While retirement and annuity plans are necessary for low-income households; they are less profitable to offer than ULIPs and endowment policies. Often the clients need to do their own retirement planning, as dealers do not have any obligation to provide credible guidance.
Some product design standards have accidentally led to the manufacture of items that are inappropriate for the requirements of low-income families. However, they have generally pushed towards such households just because they are profitable for the companies and the dealers.
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Policy Renewal
Incentives are not growing proportionally for dealers that invest more attention and incur more expenses to serve difficult-to-reach clients. As a result, without correct guidance and reminders, policy lapses are becoming common. This leads to very low persistence rates even when the company monitors the statistics.
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Life-cycle Servicing
The common problems such as:
- A dearth of information on the claims procedure
- Incapacity to perform the procedure on one’s own, and
- An absence of any responsibility imposed on the dealer to give help to applicants
diminishes the usefulness that insurance plans offer the household. Clients are leery of future insurance purchases after having had unfortunate experiences with rejected claims. People tend to omit the essential and critical details during the sale of the insurance plan. This has led to many claim rejections. There are no incentives for the dealer to guide claims; it is not in the objectives of a company to increase claims processing. The expense of assessing each claim, particularly for minor claims, is impractical without proper assistance. This is true for both the company and the consumer.
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Lack of Comprehensive Services
Insurance dealers and some other conventional mono-product distributors, including micro-insurance agents, and IMF offer goods in several regions after complying with the relevant regulatory standards. Also, most multi-product suppliers can deliver complete financial solutions. However, the lack of a unified regulatory framework for investment goods creates unethical incentives for miss-selling investment products.
Bank branch offices serve as reliable last-mile interfaces for comprehensive insurance services. Banks, on the other hand, are hesitant to enable their business correspondents to market goods from other banking institutions. As a result, there is no healthy rivalry to provide solutions that perform ideally for the client.
Recommendations to face these Challenges
To face the above-mentioned challenges, here are 3 major recommendations.
- Distribution Channel Design
- Every low-income family should be able to receive a portfolio of financial solutions that will lead to total financial service with minimum effort. Furthermore, financial inclusion in Insurance must be simple to receive, credible, and useful in determining what coverage to invest in.
- All financial sector authorities can work together to develop a uniform set of eligibility requirements that any business financial services supplier must follow to sell specific product pairings to households. A dealer of this type is known as a ‘Financial Services middleman. While all banking institutions must satisfy all eligibility standards, all other business intermediaries involved in the selling of financial goods are compelled to fulfill these requirements in stages.
- The RBI might contemplate giving validity to a ‘marketplace’ model to banking, in which clients can shop and select their financial products. This can be done by engaging with a market akin to the IRDAI’s online aggregators. This business correspondent concept is an obvious option for building such a market, and it can alleviate some of the concerns noted before with the Business Correspondent structure.
- In conjunction with other participants, the RBI may consider creating a phased approach to classifying BC intermediaries based on the
- The intricacy of services they can provide and
- The complexity of corporate procedures
they can perform for marketing and maintaining these services.
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Operations and Suitability
- Regardless of their license type, all agents must adhere to the same principles of customer service. Universal behavior obligations need to be implemented similarly across all governed enterprises. Projected returns as a proportion of the premium or total invested amount. Alongside, previous and expected internal rates of return must be disclosed beforehand. Thus, all suppliers must guarantee that consumers have access to high-quality disclosures of policy features as an essential part of their duties.
- The numerous financial sector regulatory authorities must establish a set of principles that regulate the applicable financial operations the products must adhere to, and each company can then establish standards on how to achieve these fundamentals.
- Regulators must require regulated firms servicing retail consumers to do appropriateness assessments as part of all product selling procedures. An evaluation of this type must analyze if the insurance product that the customers opt for meets the appropriateness standards while servicing. Supervisory procedures must then evaluate and monitor dealer network performance on the overall quality of such evaluations, release the outcomes of these regulatory inspections, and take punitive penalties against distribution networks found to be distributing inappropriate items to their clients.
- Regulators can establish a list of worldwide unfit services that cannot be provided to families or firms with less than a particular income or personal wealth, or persons over a certain age limit.
- A board-led approach must guide product development and sales operations aimed at low-income families. The use of business procedures and tools can increase efficiency and support employees when further training is no more sufficient to compensate for capacity restrictions.
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Business Cost Reduction
- A centralized KYC system serves the purpose. It should support the reuse of KYC done for a previous customer while purchasing products under the same or different regulator.
- Urgent revision of the CERSAI’s Central KYC Registry.
- All authorities should consider allowing their regulated firms, such as:
- banking institutions,
- NBFCs or Non-Banking Financial Corporations, and
- Insurance companies to utilize CDSL Ventures Limited – Know Your Customer performed by SEBI-registered KRAs.
- Alternative KYC processes to those already in place need investigation. In this, the requirement for KYC is abolished or much reduced if payments start from a KYC validated bank account.
- Regulators must allow digital ways of conducting KYC, Video KYC and, Aadhaar e-KYC with proper safeguards in place.
- Establishing standing orders to auto-debit from a bank account for recurrent premium payments lowers the agent’s cost of initiating this transaction every time a scheduled payment for the client is due.
- To achieve fairness amongst distributors who choose online transactions over cash purchases, costs resulting from fines for unsuccessful ECS debit transactions must be justified.
- The current payment system does not enable users to digitally designate and collect small quantities for financing insurance premiums. UPI 2.0’s one-time mandate tries to provide a system in which the client can establish a mandate for a specific sum.
Conclusion
Financial inclusion is important in the insurance industry to gain access to a wider range of customers. Therefore, the insured are people with jobs, incomes, and their own homes. This is likely to include high-potential customers whose development can help the long-term development of the insurance business. Consequently, financial inclusion will assist ensure a sustainable development track for the insurance industry and help build a sound foundation for tomorrow’s growth.
About The Author
Mayank Sharma
MBA Finance
He is a professional who brings extensive knowledge and expertise to the field of group health insurance. He has dedicated 7years to helping individuals and businesses navigate the complexities of insurance. Having worked closely with numerous clients and insurance providers, he deeply understands the nuances of group health insurance policies. With a reputation for providing insightful and informative content, he leverages his industry experience to educate readers about the importance of group health insurance and its benefits. Through their articles, Mayank Sharma aims to empower individuals and businesses to make informed decisions about their healthcare coverage, ultimately promoting healthier and more secure communities.