 "'Growth has fallen, but there has been a qualitative improvement'")
The Business Standard Insurance Round Table was attended by R K Nair, member-finance & investment, Insurance Regulatory and Development Authority (Irda); G Srinivasan, chairman and managing director, New India Assurance; Bhargav Dasgupta, managing director and chief executive officer, ICICI Lombard; Amitabh Chaudhry, managing director and chief executive officer, HDFC Standard Life; P Nandagopal, managing director and chief executive officer, IndiaFirst Life; and Suresh Mahalingam, managing director and chief executive officer, Tata AIA Life. The discussion was moderated by Shyamal Majumdar. Excerpts:
Moderator: The insurance regulator says customer protection is supreme, while the insurance industry says stringent norms have affected growth. Mr Nair, your comments on regulatory activism stifling the growth of the sector.
So, I am just trying to make the point that vis-à-vis these two countries with whom we benchmark ourselves, India seems to have fared well, although penetration has fallen. The other point is that growth in life insurance is a function of the country's economic growth. In the last two years, household savings as a percentage of GDP have actually fallen drastically from 12 per cent to about 9 per cent. However, very surprisingly, when we analysed the insurance data vis-à-vis household savings, it remained more or less constant, at around 23 per cent of overall savings.
I agree that first-year premiums have fallen in the insurance sector, but renewal premiums have gone up. There is a marginal increase in the renewal premium of both LIC and the private sector industry, which is a good thing. There has been a qualitative improvement in terms of growth and this kind of growth is sustainable.
Moderator: Many say there is a growing trust deficit between consumers and the insurance companies. Do the insurance CEOs agree?
I would also agree that the regulatory steps were initiated because of our actions; so we cannot blame the regulator. We have done it, we have kept doing it and the regulator is left with no choice. Because of these changes, the trust deficit has grown with the regulator as well as the customer. The customer believes that the reason why these changes have been made is that there was obviously something wrong.
The second point is that the industry agrees that there is no dispute with the regulator in terms of the direction of the reforms. I think everybody must really talk about the customer first, because without customers the industry does not exist. We have to examine why the customer is not interested in long-term financial products like pension, which will give him an opportunity to accumulate wealth over a period of time.
The industry clearly is paying huge amounts of claims. In fact, every company today pays 80-85 per cent of the premium as claims. I am not talking of expenses and procurement costs; so clearly, there is no reason for the customer to feel that the industry is not giving them a good deal. But then, we need to remove that perception by improving awareness.
It's fundamental consumer behaviour. When you first get affluent, you look at consumer loans, you buy a property, you buy a car, you buy a house and then you start thinking of protecting those assets. So it's a natural movement of flow of money going into general insurance and that's beginning to happen. So if we look at the true potential, our belief is that this industry can grow at a pace higher than 20 per cent.
For the general insurance industry to grow at a higher pace, a couple of things are necessary. First, on the product side, where, unlike investment-type products, the scope of mis-selling in general insurance is relatively low by design. Having said that, at times you may not fully understand all the terms and conditions in the policy. These need to be simplified.
The second area is better communication - explaining to customers what insurance stands for. There is scope for explaining the insurance model a bit better. For example, there is no reason to create a perception that claims are not paid. And thirdly, I think there is still scope to speed up the time taken to settle claims.
While 2004 to 2008 was a win-win for all, 2008 to 2010 was a period of a little bit of confusion, and 2010 to 2012 was a period of regulations. Moving on, the thrust should be on development and building on the trust.
MODERATOR: But recent changes by the regulator were not exactly welcomed by the industry. Keeping that in mind, will the golden era that you are talking about ever come back?
Chaudhry: If the economy continues to grow at six to eight per cent, there is no reason why general insurance and life insurance should not grow at 2.5 to three times that growth rate. I am very confident that the growth era will come back, though it may take some time. I am sure the regulator is also watching growth because, ultimately, they are also in the job of developing the insurance market. Hopefully, in the next two to three years, the growth in the life insurance industry should be similar or close to what the general insurance industry is enjoying.
Srinivasan: The time consumed while approving a product is a cause for worry. It takes time, as the regulator goes into every word of the product. But now that the industry is well-settled, the regulator could just focus on some six to seven important areas of a product, which are non-negotiable. Pricing and innovations and products should be left to the insurance company.
Moderator: That doesn't seem to raise hopes of a win-win situation that Mr Mahalingam spoke about.
Nandagopal: No one - least of all the insurance companies - made any money during the so-called golden period. Having said that, I think things will definitely improve, considering that there is a leadership change in the regulator. Since the new regulator is from the industry, there is an opportunity for the industry to talk in a language that the regulator very easily understands.
Moderator: The regulator is of the view that insurers have a large bouquet of products, not because they are different from each other, but to enable premium churn. What's your view?
Mahalingam: I think it is a myth that insurance companies have lots of products. We have four to five to six products which constitute the bulk of the volumes. If you really look at life insurance, what are their needs, for children's savings, for protection, long-term savings, and the needs of pensions. Having said that, I think we are now reaching a stage where all of us are defining customer segments. We have an age band starting from 18 to 58, so the needs are different for different age groups.
Chaudhry: No insurance company is introducing new products unnecessarily. There is a huge cost to not only introducing a product, but you have to service that product for the next 10-15 years. I agree that the regulator should allow some flexibility for us to manage. The regulator believes that if flexibility is allowed, some companies will take advantage of it and not do things the right way. We need to demonstrate to the regulator that we can be trusted and that is why these flexibilities need to be allowed.
Moderator: Mr Nair, there is a demand for mandated insurance products. Do you think the time has come to mandate products?
Nair: Let me first respond to some of the things that have been said about products, pricing and the promotion of products. It's not that the regulator is not concerned with slow growth. Not only the regulator, even the policy makers are concerned, because ultimately, insurance money is long-term savings, it channelises money into long-term investments required for infrastructure. The country needs lots of money for infrastructure and unless insurance and pension money come into infrastructure, we will have a problem in terms of long-term growth.
And the third part is need-based selling, and clearly, what Mahalingam said was very important. You need to identify the needs of customers and sell them a bouquet of insurance products. In the recent Budget, the finance minister has announced some measures in terms of distribution of insurance products, opening of branches. I think the footprint of insurance will increase, because even at the highest level we want to grow this industry. We all are with the industry in terms of growth.
While there is a mandated third party motor insurance, the industry has made a suggestion that it should be mandated insurance for health and property. The other aspect is that there is a tax differential between pension products offered by insurance companies and the National Pension System. We have taken it up with the government and have suggested a level playing field.
Moderator: Mr Srinivasan, under-pricing is a big concern for the industry generally. What is your view?
Srinivasan: This is evident in two areas. One is on the motor third party front, which is a major problem for the general insurance industry and will affect the performance of the industry. The pricing, which is regulated, is still not adequate to cover the losses. The Motor Vehicles Act is wide and liberal and the lawmakers do not seem to be in a hurry to bring it in line with international practices. That is a major challenge. The second challenge is in the property line of business, where prices have dropped substantially after de-tariffing. There has been some improvement and prices are going up, but not to the extent we all want.
Moderator: Mr Dasgupta, a lot of companies are trying to show reduction of losses by under-reserving. How rampant is this practice?
Dasgupta: At an industry level, this has been seen over the last two years in the motor third party pool. It was put into a pool structure and no one company had full awareness or understanding of the data that losses were building up.
The number one reason why a company goes down is under-reserving. So, reserving and hence proper pricing is important. We have seen that companies which consistently run a very high combined ratio are a systemic risk to the industry, because if anything happens to that company, it will have a huge negative impact on the image of the industry. There is scope for encouraging companies with a low combined ratio and asking for higher capital requirement for companies which have a high combined ratio.
Moderator: Mr Chaudhry, the most significant provision in the Budget is allowing banks to act as insurance brokers. But the Reserve Bank of India has reservations on the issue. How hopeful are you? And even if it is allowed, do you think it would bring about a significant change?
Chaudhry: I think the finance minister announced a number of things around the insurance industry and this is a significant one. The expectation is that it will encourage banks to sell products of many more insurance companies across their franchise. It seems Irda is willing to look at it positively, but RBI will respond to it once they see the regulation coming from Irda. So, I think there is still some distance to be covered in terms of what form and shape it will take.
The second important point to consider is why will banks do it? Banks are not going to do it because customers are beating down their doors and saying that we want insurance. They want to do it because they want to make money in the whole process. It will take some time to pan out.
Nandagopal: The growth of business through banks will not happen merely because the Budget has said so. The engagement levels that are required for selling insurance are quite deep.
Mahalingam: In Asia, distribution through banks is increasing. I don't see why India should be excluded from the Asian story. We need to find the right mix, whether it is full broking, whether it is more than one, whether it is a couple. I think we need to develop it gradually, but opening up banks to sell more than one is a prerequisite, and I think that augurs well for the industry. The second missing link is that in distribution you cannot have the same product for all channels of distribution. There is a need to customise products catering to that channel because the very definition of channel is a group of customers who behave in a homogenous manner.
Dasgupta: Once the broking model comes into the general insurance industry, it is highly possible that a bank will choose one insurance company for selling one product and another to sell a different product. Typically, the argument from the insurance industry is biased, whether the insurance company has a bank insurance partner today or not. And we obviously have a strong bank insurance partner, but even then at the end of the day, we believe that it is a good development in the long term. What we need to see is whether the broking model is going to be effective only because of higher payouts to banks.
Srinivasan: The current bank assurance model has not really made a big breakthrough, especially on the general insurance side, because the banks take no responsibility. Secondly, I personally feel that this will also lead to penetration, because there are many bank branches in small centres and, clearly, we can leverage them.
Moderator: Irda has a new chairman - somebody who is from the industry, and so hopes have been raised. Could each one of you mention two things that you want from Mr T S Vijayan?
Chaudhry: They have been doing a lot of things for the last 10-12 years, and it is not very easy to change them. There are some specific issues as far as the insurance industry is concerned, like issues relating to product approval, which need to be taken care of. I think industry has been harping on micro-regulation. The question to ask is, do you need to micro-regulate every aspect of our business? I am sure Mr Vijayan is obviously delving into each one of them. Am I expecting changes to happen in a short period of time? Frankly, no, because these are complex problems. So we need to be patient, we need to work with the regulator.
Nandagopal: I think customer-friendly and industry-friendly distribution reforms are definitely the need of the hour. There is genuine concern and confusion in the minds of the public regarding pension products, and how we address the long-term needs of accumulation as well as annuity. And PFRDA and Irda are obviously two regulators who definitely have domain control on this particular thing.
Srinivasan: His first focus should obviously be on increasing penetration levels and density by looking at product approvals and distribution strategy; and secondly, I think better collaboration with the industry. Today, the regulatory process starts with an exposure draft which is immediately followed up with regulation. I feel there is need for more discussion with the industry.
Dasgupta: On the growth side, I would look forward to a lot more freedom on the distribution side. Also, let me re-emphasise, one big area where a lot of work needs to be done is increasing penetration. On the underwriting and the capital side, I think there is a lot of scope for movement towards a risk-based capital model.
Maha
Moderator: The insurance regulator says customer protection is supreme, while the insurance industry says stringent norms have affected growth. Mr Nair, your comments on regulatory activism stifling the growth of the sector.
So, I am just trying to make the point that vis-à-vis these two countries with whom we benchmark ourselves, India seems to have fared well, although penetration has fallen. The other point is that growth in life insurance is a function of the country's economic growth. In the last two years, household savings as a percentage of GDP have actually fallen drastically from 12 per cent to about 9 per cent. However, very surprisingly, when we analysed the insurance data vis-à-vis household savings, it remained more or less constant, at around 23 per cent of overall savings.
I agree that first-year premiums have fallen in the insurance sector, but renewal premiums have gone up. There is a marginal increase in the renewal premium of both LIC and the private sector industry, which is a good thing. There has been a qualitative improvement in terms of growth and this kind of growth is sustainable.
Moderator: Many say there is a growing trust deficit between consumers and the insurance companies. Do the insurance CEOs agree?
I would also agree that the regulatory steps were initiated because of our actions; so we cannot blame the regulator. We have done it, we have kept doing it and the regulator is left with no choice. Because of these changes, the trust deficit has grown with the regulator as well as the customer. The customer believes that the reason why these changes have been made is that there was obviously something wrong.
The second point is that the industry agrees that there is no dispute with the regulator in terms of the direction of the reforms. I think everybody must really talk about the customer first, because without customers the industry does not exist. We have to examine why the customer is not interested in long-term financial products like pension, which will give him an opportunity to accumulate wealth over a period of time.
The industry clearly is paying huge amounts of claims. In fact, every company today pays 80-85 per cent of the premium as claims. I am not talking of expenses and procurement costs; so clearly, there is no reason for the customer to feel that the industry is not giving them a good deal. But then, we need to remove that perception by improving awareness.
It's fundamental consumer behaviour. When you first get affluent, you look at consumer loans, you buy a property, you buy a car, you buy a house and then you start thinking of protecting those assets. So it's a natural movement of flow of money going into general insurance and that's beginning to happen. So if we look at the true potential, our belief is that this industry can grow at a pace higher than 20 per cent.
For the general insurance industry to grow at a higher pace, a couple of things are necessary. First, on the product side, where, unlike investment-type products, the scope of mis-selling in general insurance is relatively low by design. Having said that, at times you may not fully understand all the terms and conditions in the policy. These need to be simplified.
The second area is better communication - explaining to customers what insurance stands for. There is scope for explaining the insurance model a bit better. For example, there is no reason to create a perception that claims are not paid. And thirdly, I think there is still scope to speed up the time taken to settle claims.
While 2004 to 2008 was a win-win for all, 2008 to 2010 was a period of a little bit of confusion, and 2010 to 2012 was a period of regulations. Moving on, the thrust should be on development and building on the trust.
MODERATOR: But recent changes by the regulator were not exactly welcomed by the industry. Keeping that in mind, will the golden era that you are talking about ever come back?
Chaudhry: If the economy continues to grow at six to eight per cent, there is no reason why general insurance and life insurance should not grow at 2.5 to three times that growth rate. I am very confident that the growth era will come back, though it may take some time. I am sure the regulator is also watching growth because, ultimately, they are also in the job of developing the insurance market. Hopefully, in the next two to three years, the growth in the life insurance industry should be similar or close to what the general insurance industry is enjoying.
Srinivasan: The time consumed while approving a product is a cause for worry. It takes time, as the regulator goes into every word of the product. But now that the industry is well-settled, the regulator could just focus on some six to seven important areas of a product, which are non-negotiable. Pricing and innovations and products should be left to the insurance company.
Moderator: That doesn't seem to raise hopes of a win-win situation that Mr Mahalingam spoke about.
Nandagopal: No one - least of all the insurance companies - made any money during the so-called golden period. Having said that, I think things will definitely improve, considering that there is a leadership change in the regulator. Since the new regulator is from the industry, there is an opportunity for the industry to talk in a language that the regulator very easily understands.
Moderator: The regulator is of the view that insurers have a large bouquet of products, not because they are different from each other, but to enable premium churn. What's your view?
Mahalingam: I think it is a myth that insurance companies have lots of products. We have four to five to six products which constitute the bulk of the volumes. If you really look at life insurance, what are their needs, for children's savings, for protection, long-term savings, and the needs of pensions. Having said that, I think we are now reaching a stage where all of us are defining customer segments. We have an age band starting from 18 to 58, so the needs are different for different age groups.
Chaudhry: No insurance company is introducing new products unnecessarily. There is a huge cost to not only introducing a product, but you have to service that product for the next 10-15 years. I agree that the regulator should allow some flexibility for us to manage. The regulator believes that if flexibility is allowed, some companies will take advantage of it and not do things the right way. We need to demonstrate to the regulator that we can be trusted and that is why these flexibilities need to be allowed.
Moderator: Mr Nair, there is a demand for mandated insurance products. Do you think the time has come to mandate products?
Nair: Let me first respond to some of the things that have been said about products, pricing and the promotion of products. It's not that the regulator is not concerned with slow growth. Not only the regulator, even the policy makers are concerned, because ultimately, insurance money is long-term savings, it channelises money into long-term investments required for infrastructure. The country needs lots of money for infrastructure and unless insurance and pension money come into infrastructure, we will have a problem in terms of long-term growth.
And the third part is need-based selling, and clearly, what Mahalingam said was very important. You need to identify the needs of customers and sell them a bouquet of insurance products. In the recent Budget, the finance minister has announced some measures in terms of distribution of insurance products, opening of branches. I think the footprint of insurance will increase, because even at the highest level we want to grow this industry. We all are with the industry in terms of growth.
While there is a mandated third party motor insurance, the industry has made a suggestion that it should be mandated insurance for health and property. The other aspect is that there is a tax differential between pension products offered by insurance companies and the National Pension System. We have taken it up with the government and have suggested a level playing field.
Moderator: Mr Srinivasan, under-pricing is a big concern for the industry generally. What is your view?
Srinivasan: This is evident in two areas. One is on the motor third party front, which is a major problem for the general insurance industry and will affect the performance of the industry. The pricing, which is regulated, is still not adequate to cover the losses. The Motor Vehicles Act is wide and liberal and the lawmakers do not seem to be in a hurry to bring it in line with international practices. That is a major challenge. The second challenge is in the property line of business, where prices have dropped substantially after de-tariffing. There has been some improvement and prices are going up, but not to the extent we all want.
Moderator: Mr Dasgupta, a lot of companies are trying to show reduction of losses by under-reserving. How rampant is this practice?
Dasgupta: At an industry level, this has been seen over the last two years in the motor third party pool. It was put into a pool structure and no one company had full awareness or understanding of the data that losses were building up.
The number one reason why a company goes down is under-reserving. So, reserving and hence proper pricing is important. We have seen that companies which consistently run a very high combined ratio are a systemic risk to the industry, because if anything happens to that company, it will have a huge negative impact on the image of the industry. There is scope for encouraging companies with a low combined ratio and asking for higher capital requirement for companies which have a high combined ratio.
Moderator: Mr Chaudhry, the most significant provision in the Budget is allowing banks to act as insurance brokers. But the Reserve Bank of India has reservations on the issue. How hopeful are you? And even if it is allowed, do you think it would bring about a significant change?
Chaudhry: I think the finance minister announced a number of things around the insurance industry and this is a significant one. The expectation is that it will encourage banks to sell products of many more insurance companies across their franchise. It seems Irda is willing to look at it positively, but RBI will respond to it once they see the regulation coming from Irda. So, I think there is still some distance to be covered in terms of what form and shape it will take.
The second important point to consider is why will banks do it? Banks are not going to do it because customers are beating down their doors and saying that we want insurance. They want to do it because they want to make money in the whole process. It will take some time to pan out.
Nandagopal: The growth of business through banks will not happen merely because the Budget has said so. The engagement levels that are required for selling insurance are quite deep.
Mahalingam: In Asia, distribution through banks is increasing. I don't see why India should be excluded from the Asian story. We need to find the right mix, whether it is full broking, whether it is more than one, whether it is a couple. I think we need to develop it gradually, but opening up banks to sell more than one is a prerequisite, and I think that augurs well for the industry. The second missing link is that in distribution you cannot have the same product for all channels of distribution. There is a need to customise products catering to that channel because the very definition of channel is a group of customers who behave in a homogenous manner.
Dasgupta: Once the broking model comes into the general insurance industry, it is highly possible that a bank will choose one insurance company for selling one product and another to sell a different product. Typically, the argument from the insurance industry is biased, whether the insurance company has a bank insurance partner today or not. And we obviously have a strong bank insurance partner, but even then at the end of the day, we believe that it is a good development in the long term. What we need to see is whether the broking model is going to be effective only because of higher payouts to banks.
Srinivasan: The current bank assurance model has not really made a big breakthrough, especially on the general insurance side, because the banks take no responsibility. Secondly, I personally feel that this will also lead to penetration, because there are many bank branches in small centres and, clearly, we can leverage them.
Moderator: Irda has a new chairman - somebody who is from the industry, and so hopes have been raised. Could each one of you mention two things that you want from Mr T S Vijayan?
Chaudhry: They have been doing a lot of things for the last 10-12 years, and it is not very easy to change them. There are some specific issues as far as the insurance industry is concerned, like issues relating to product approval, which need to be taken care of. I think industry has been harping on micro-regulation. The question to ask is, do you need to micro-regulate every aspect of our business? I am sure Mr Vijayan is obviously delving into each one of them. Am I expecting changes to happen in a short period of time? Frankly, no, because these are complex problems. So we need to be patient, we need to work with the regulator.
Nandagopal: I think customer-friendly and industry-friendly distribution reforms are definitely the need of the hour. There is genuine concern and confusion in the minds of the public regarding pension products, and how we address the long-term needs of accumulation as well as annuity. And PFRDA and Irda are obviously two regulators who definitely have domain control on this particular thing.
Srinivasan: His first focus should obviously be on increasing penetration levels and density by looking at product approvals and distribution strategy; and secondly, I think better collaboration with the industry. Today, the regulatory process starts with an exposure draft which is immediately followed up with regulation. I feel there is need for more discussion with the industry.
Dasgupta: On the growth side, I would look forward to a lot more freedom on the distribution side. Also, let me re-emphasise, one big area where a lot of work needs to be done is increasing penetration. On the underwriting and the capital side, I think there is a lot of scope for movement towards a risk-based capital model.
Maha