The year 2011 brought in the beginning of a new decade for Indian Life Insurance industry. The preceding years were significant for the life insurance industry in India after the opening of the sector by the government. During the period 2000-2008, combined with India’s rapid rate of economic growth the Indian Life Insurance Industry gained its foothold in the country. Private sector insurers ventured into the country and the industry got a taste of market-driven competition, compared to the time when insurance business was dominated by only public sector insurers. The beginning of this new era in the development of insurance industry saw proliferation of new products and distribution channels which promoted rapid growth of the industry.
The phase also witnessed continued regulatory action which is shaping the insurance industry currently. The regulatory changes introduced in September 2010 signaled the intent to shift the orientation of the industry for unbridled growth towards longer-term savings and protection and deliver more efficient propositions to consumers. There is also no doubt that the regulatory shifts had material impact on all life insurers in India.
Given the above scenario, the current challenges in the life insurance industry have various factors guiding the market.
Domestic economic conditions – No matter how well-managed or financially sound a given insurer might be, none are immune to the effects of a contracting or slow growing economy. The double-digit inflation rate is an uncomfortable factor for the Indian economy. And the central bank of India, RBI, has the huge task of balancing the two – controlling inflation without dampening growth too much.
The interest rate and inflation trade off is the central bank’s core business and the last one year has been a very difficult for the central bank. While the Reserve Bank of India (RBI) has been raising repo and reverse-repo rates consecutively every quarter in an attempt to manage inflation, it has not succeeded in moderating inflation. This probably implies that inflation is more of a real sector supply side issue than a monetary implication. Implications of this relatively high interest rate and high inflation regime are unlikely to be positive for the Insurance industry in general. On one hand it would be difficult for the life insurance industry to manage return expectations as they are likely to be high. In the high interest scenario, higher assured returns are required for increasing penetration while competing with fixed income products. While there may be some reduction in actual growth rates but India's long term fundamentals remain intact and Life Insurance being an industry with very long term horizon, it would be able to tide over the economic cycle. On the other hand inflation means lower disposal income in the hands of consumer leading to lower household savings which currently stands at a healthy 34.7%, though significantly lower than China’s 50%.
Global Economic conditions – The other concerning factor is the rising crude oil prices and rupee depreciation. Domestic oil companies have upwardly revised prices very often. Secondly, the Euro crisis and the instability of the US economic conditions too will bring in a ripple effect on India, mainly on financial markets and import oriented industries. Connecting the two syndromes – the exchange rate (rupee devaluation) impacts India through oil imports and increased prices of fuel and transport (which gets factored in inflation). It is almost a double whammy kind of situation – inflation, whichever way it happens reduces disposable income and discretionary spend does get affected.
On the other hand, exchange rate devaluation has some positive effects also such as higher exports (goods and services) and increased employment which would hold good for the insurance industry in the long run.
Consumer related challenges
Low financial literacy and poor access to financial services in India pose a problem in penetration of the right kinds of life insurance products - more in terms of the right mix of savings and protection. This is combined with the fact that consumers and distributors both lack understanding of the true purpose of life insurance. Consumers are not clued in about their life stage needs, and the product solutions suitable for such needs. The distributor, armed with an array of products is also unable to give proper insurance guidance to the consumer due to limited knowledge of the true purpose of each financial instrument. This leads to mis-selling, which is a huge negative factor for the life insurance industry.
The MNYL-NCAER India Financial Protection Survey done in collaboration with Max New York Life Insurance had yielded some worrisome results. The research had revealed the problem of uninsured and underinsured Indian households. At an all-India level, for all insured households, while the average sum-assured of a life insurance policy is Rs 1,14,450, the average premium paid is Rs 5,007 only. The awareness level about life insurance is higher for people in the older age group. It is important for consumers across demography to understand the true value of life insurance.
In India, there is hardly any state supported social security system. The number of Indians over the age of 60 will grow to more than 21.8 crore in 2030. Today, at the age of 60, an Indian has an expected life up to 75 years – by 2020 an individual of 60 will have an expected life up to 80 years of age. According to studies, only about 11% of India’s working population has any form of social security at all.
The reason for citing the above data is to talk about the next challenge – longevity. As the average longevity of people has increased, the number of years people spend working are less than their non-working years. This requires people to plan their future in such a way so that their savings help in the autumn years. Unfortunately, consumers are not savvy enough to understand or plan their needs for this time.
Life Insurance is best suited to help consumers overcome this problem. While the industry will have to develop suitable products, it also has to overcome the challenge of lack of awareness of this issue. The key is to start as early as possible and sticking to the plan.
India is a diverse country with various languages, food, culture, spending and saving patterns. Historically, the majority of life insurance players have followed a national strategy, with largely similar distribution and operating models across geographies. Going forward, with increasing economic pressures, players will need to make very conscious choices about ‘where’ and ‘how’ to compete. While advice based sales through agency distribution remains the most suitable distribution channel, to expand the reach there is a need to utilize the existing retail distribution networks available in the country. This may require simplified product designs to promote OTC life insurance solutions.
For bancassurance, even though an open architecture will provide better choice for the consumer, in the Indian context it also needs to be viewed from societal perspective. Access to customers and quality of customer relationship should be the primary focus of the channels. It needs to develop in terms of grievance redressal and knowledge pool. The banks are not yet equipped to handle complex customer requirements with increasingly sophisticated products being launched by the life insurance companies.
Notably, increasing the number of partners may not lead to increase in insurance penetration and/or financial inclusion. The number of bank branches across the country will anyway remain the same even with two insurers.
Impact of regulatory changes and the new challenges it poses
The regulatory changes that have been implemented in the past two years included ULIPs regulation that brought in a price control taking flexibility away from life insurers. This influenced distributors’ commission. In fact, India has now the lowest commission rates for agent advisors. It is imperative for agents to be motivated as they are the faces of life insurance companies. In order to build a career-agency model, adequate compensation is critical.
The regulator IRDA has also tightened the performance criteria for agents in its effort to improve the persistency ratio in the industry. The agents have to ensure that the average annual persistency ratio should be 50 per cent. Though good for the industry in the long run, this poses a challenge for many agents in the interim.
Another big challenge is attracting committed and quality talent to the industry. It is important to have good quality sales managers and agent advisors to ensure need-based selling and right-selling. This will require behavioural change in agent advisors so that products are not mis-sold. Life Insurers need to impart training to advisors to address this challenge. Max New York Life Insurance invests significantly into the training of agent advisors through pre-licensing
training for around 100 hours instead of the stipulated 50 hours by IRDA and a continued course curriculum of 250 hours in the first 2 years.
The latest draft of the DTC has suggested removing or reducing certain tax incentives from Indian life insurance products. It is these tax breaks alone that explain why the life penetration rate of 4.4% in India is higher than in China (2.5%) and even the US (3.5%). Implementation of DTC in its current form, especially with the no-grandfathering provision, does not bode too well for the industry’s long-term growth outlook.
While it is important that the life insurance industry is well regulated in terms of providing value for money or benefit to the insured/consumer, the regulator also needs to ensure that the business of insurance is profitable and earns adequate return on investment. It is extremely important, as it plays an important role in deepening the financial sector of the country. Life insurance industry also provides long-term infrastructure funds by routing small savings to long-term investments.
In addition, the government also needs to make suitable interventions and facilitate business models for increasing financial inclusion through micro finance, micro insurance and social security /safety net mechanisms.
Perceptions of influencers
Another major challenge is posed by the media and influencers. Often, the life insurance industry is portrayed in a negative manner and hence the consumers become skeptical of the life insurance industry. The result is that, they may not purchase life insurance, even though a legitimate need exists. The fact the life insurance promotes a regular routine of small savings for long term savings and protection is not propagated.
It is important for media and third-party influencers to look at the bigger picture on life insurance. They must understand that life insurance products should not be compared to any other financial products on calculated returns alone. They should also take into consideration, the discipline life insurance instill in the financial planning.
The Way forward
As mentioned earlier, Life Insurance is critical for the development of Indian economy. Apart from a brief dip in FY 2009 due to downturn, the industry has grown around 20 per cent per annum. In the first decade of privatisation the insurance penetration has doubled, which has all going for it to only rise significantly in a country of 1.2 billion people.
Post the global financial crisis financial capital infusion by foreign partners has considerably slowed down; from Rs 8,170 core in 2008-9 to less than Rs 2,300 crore in 2010-11. For a capital intensive business like life insurance, the trickling down of capital severely impacts growth and also changes the strategy that the company adopts with its business. The fabled increase in the insurance FDI limit from 26% to 49% (consistent with banks sector) is on hold currently till the next parliamentary session. The much debated issue on allowing insurers to tap the capital markets has also not resulted into anything significant with regulatory roadblocks delaying clarity on companies floating an IPO.
However, all is not lost. The Indian life insurance industry’s biggest advantage is the country’s favorable demographics. Market penetration will be guided by the rise in income levels. From 80 per cent policy renewals in early 2000s, today only about 65 per cent policies come up for renewal after the first year. The working population (25–60 years) is expected to increase from 675.8 million to 795.5 million by 2025 with the projected per capita GDP expected to increase to Rs 100,680 in 2025, which is indicative of rising disposable incomes.
Indian’s are inclined towards savings and research has shown that life insurance is the first financial product majority turn to. And it is high time that the regulator, consumer bodies and the insurance companies collaborate together to yield effective and measurable results.
With increasing levels of income, higher cost of living and longer life expectancy, the Indian consumer will require innovative products that will cater to wealth management, protection and retirement solutions. For insurance companies, profit from innovation will be integral to driving success, and technology will help insurers to develop and customize products to befit individual needs. Consumers are increasingly becoming multi-channel in terms if their interaction with financial institutions. To buy insurance products, insurers will have to gear up with robust IT solutions to cater to that need.
There will be need of proper financial planning for the Indian consumer. And hence, need for quality of advice in managing their financial need will be critical. Insurance agent advisors need to be trained and be their primary source of financial advisor. The customer-agent relation needs to be deepened by suggesting life-stage related selling.
It is time for various stakeholders – life insurers, regulators, distributors and consumer groups – to come together to build a robust life insurance sector in India which will help create a secured society.
The author is Managing Director & CEO of Max New York Life Insurance