 "'The trust deficit needs to be plugged at all cost'")
Moderator: Mis-selling is still the biggest issue. Why hasn't the regulator been able to fix the problem?
R K Nair: Till 2009, insurance companies were offering superior returns relative to banks. With the capital market booming, lots of investment products were sold. But the slowdown has probably caused a lot of discontentment among customers, particularly for investment-linked products. So the regulator suggested many changes like capping of commission, etc. to make them more of an insurance product than an investment product. Further reforms have happened since then and I believe there will be a more healthy and orderly growth. In non-life products, complaints have actually fallen.
Why has the general insurance industry slowed down this year?
General insurance players have been reducing premiums to grab market share. How long can you sustain this?
If you see segment by segment, the scope for penetration is huge. It is important for all of us to see that the business is run in a profitable way so that we are able to invest to capture that opportunity. If you see the penetration number, we are at 0.78 per cent, while China is at 1.25 per cent, Russia 1.25 per cent and Brazil 1.6 per cent. So there is a long way to go.
Life insurance has done well this year, but net premiums are down.
Has the industry done enough on innovation? The perception is different.
Everyone says the new guidelines have brought in transparency. But has the regulator been fair to insurers?
The banks-as-brokers model is hitting the headlines. What's your take?
Will the regulator make it mandatory for all banks to become brokers?
Nair: In my view, it is a very good concept. Open architecture is there in mutual funds but banks are not altruistic. They sell products that give them the best commission. To convert a non-altruistic animal to an altruistic animal looks like a rather difficult proposition in my view. You have to bring a mindset change to represent clients rather than companies. The regulator could have a set of incentives and disincentives which will promote better behaviour among intermediaries. But probably banks should not be forced and be given a transition period to become a broker.
Chaudhry: There is this feeling that there is mis-selling in insurance and it will go away when it is opened up. But this notion may not be correct since the broker model has one of the highest levels of mis-selling. Banks have to understand that they can serve customers through this and not merely earn income. But why this open architecture in banks only? Why is it not being talked about in agency, where we have closed architecture? The opposition is on the detailing and not the concept.
Nandagopal: Mis-selling is not the monopoly of any channel and happens across the industry. In the short term, there will be a push back and business volumes will come down. In the long term, it is good. There is a case for an open architecture in everything, but it cannot be mandated at the cost of existing investments and relationships. Options must be made available and there should be a level playing field.
Rau: The open architecture for banks and for individual advisors are two independent subjects. They cannot be linked as the distribution channels are completely different. I don't see how an agent who is a 10th or 12th class pass will represent several insurance companies. On the one hand, banks say that it is complex; and they have full time-employees and have infrastructure to support training and development. Moving to a broking format will reduce the instances of mis-selling by making it mandatory for a bank to offer choice to the customer.
Srinivasan: You should look at the credibility of the insurance industry. Today, many banks look at insurance as revenue generation and don't put in resources and training. Mis-selling via bancassurance is much higher than in other areas. If banks want to enter this space, let them enter seriously, have different streams that are completely professionalised and sell products to customers. Otherwise, the current trust deficit will only get accentuated. Banks are in a powerful position vis-à-vis customers.
What's the industry's take on persistency? Many view Irda's recent move to allow every insurer to decide on their own criteria for persistency as a strange move.
Nandagopal: I think the industry has to have a certain kind of self-governance mechanism. The industry should take steps to improve the persistency. Lack of persistency creates surrender profit, which in turn contributes to the balance sheet. And that is the reason perhaps why people do not invest so much into the profit of the long-term embedded value. But that is a technical matter and people can look into that. By just mandating something, it may not happen. The industry has to make sure that the agents are properly trained. You have convenient technology to make the correction. And the customers should look at the policies as a long-term thing and not just as a one-time investment.
Chaudhry: The regulator has given a very clear signal to the industry about what it wants the industry to do about this problem. They expect the persistency to come up to a certain level. I think the industry should go back to the regulator, saying this will mean that a lot of agents will have to go out of the industry the moment this comes into play. While Irda has withdrawn it, that doesn't mean it can't bring it back.
Rau: It's not an easy decision. If you take a call of terminating an agent who's at a persistency of about 35-40 per cent, you'll probably go down to zero per cent. What we were worried about really is that it'll worsen the persistency. Again exiting branches or locations is not an easy call to take. When you see you have exited a particular location or shut down a branch, your book really suffers, the renewals don't come through. So the other consequences are unintended. We actually felt, in the short-term, this could worsen the persistency. We are expected to behave and make sure these numbers improve.
Why did the regulator take a U-turn on persistency?
Nair: The regulator has set some norms for the agencies. And in my understanding, the agency force is declining. And the regulator has set some very high standards in terms of passing exams and marks that should be obtained. We support the industry's views that we need more intermediaries in the market in all forms like agencies. You have to create a structure where the fellow who is selling insurance should be able to sustain a family. Therefore, a higher persistency is an ideal thing. By our regulatory norms, we've been able to create the management oversight and the governance within the company itself. I am sure higher persistency will drive higher growth and profitability in the long run.
Health is clearly the fastest growing business. Let's bring back the main point about aggressive discounts. Will this strategy work?
Dasgupta: You can't build a business on unsustainable pricing. And if you look at the overall health portfolio, there are only a few segments of the business - corporate, government and retail. The first and the most obvious point is that if you're continuing to get these people on board then you need to continue to provide them good service. If you don't, the trust deficit increases and obviously you won't be able to sustain this growth. If you look at the three segments, the retail portfolio largely for most companies is typically profitable. There are certain challenges in the retail portfolio as well because the regulator does not agree to annual price increases. There is also roughly about 15 per cent medical inflation that we all are aware of. So very soon the portfolio starts getting into zones of unprofitability. That is something that we need to look at (annual price increase).
If you turn to the corporate portfolio, some companies may be making a bit of money. But overall on an aggregate basis, the industry is losing money. I don't think there is any real incentive and disincentive for underwriting. One of the things we've been talking about is that we need to look at some form of risk-based capital model. Even if we come to a very simple solution, for example in group health or in health portfolio if you're consistently running a combined ratio of let's say X, more than 100, put in more capital.
The third segment on health side is again the government portfolio which behaves very similar to the group portfolio. The year the group portfolio is bleeding because of underpricing, the government portfolio also bleeds. And this is a larger risk for the industry and the sponsor.
How do you see the concept of insurance marketing firms, which are some kind of a half-way house between an agent and a broker?
Kedia: We haven't resolved the fundamental issue of trust deficit of the customer but are jumping into a model which starts with a conflict. An agent representing five companies has no liability towards the customer, the only thing that he would do is sell the product of the insurance company that offers the maximum commission. And the regulation on the insurance marketing firms will be far lesser than the broking system. I am worried from the customer trust deficit perspective. We hear a mechanism of push distribution. Addressing the core of 'can we create a pull environment?' can resolve a lot of things.
For all market participants, growth means top line growth whereas bottom line will be automatically taken care of. I think if the industry is obsessed with the top line, we will be led into a lot of other problems. It is very common for insurance companies to say that how can a client expect a full claim settlement when he was so tight in giving the premium. I think we need to get out of this how-we-cannot-settle a genuine claim kind of mindset.
Are insurance industry CEOs obsessed with only top line?
Srinivasan: There should be full emphasis on the bottom line as well. If a company does not make enough profit, there are automatic checks. Yes, we should move to a risk-based solvency so that there is adequate capital consistent with the underwriting efficiency of an organisation and also with the underwriting results they produce. While growth is certainly important, there must certainly be a focus on the bottom line.
Chaudhry: Broker model accounts for the highest number of mis-selling complaints and extracts the maximum amount of money from the industry. But you need to understand why some players are obsessed with top line. If you look at profit and loss, unless you have top line there is no profit. With all the infrastructure that insurance companies have created, a lot of it is fixed. If you don't get a certain amount of top line, there is no profit. And in the life insurance industry, the problem starts with top line. There is no growth, there is de-growth and expenses cannot be cut beyond a point. That is why there is focus on top line.
Kedia: While I concede that all is not good with brokers, we all know that statistics speak what we want them to speak. That is what is happening on the claims side. Let us look at some statistics from the claims side. On non-life property premium, the average market reduction is 85 per cent from the tariff rate. If the premiums on property claims come down by so much, does this mean that India has become very secure and claims have stopped happening? No, we believe that claims denial has gone up.
What is happening in the market is that the number of claims settled has improved. But customers say that when the claim is small, the insurance company is quick to settle the claim. But when it is a large claim, the insurance company realises even if the relationship spans 10 years, it cannot recover this premium and the claim is stuck for ever. So, large claims have become a major issue in the industry.
The second problem is that a customer cannot go to a broker for seeking claims advice if he has not used the broker for placement of services. This is not allowed only in India. We have represented many times and the regulator allowed it partially. But the General Insurance Council intervened and said up to Rs 1 crore, the broker could be involved. But the problem is in the large claims. So we have a serious issue of customers neither getting the claim nor can he seek help.
Rau: On the point that brokers have the highest number of complaints followed by bancassurance and then agents, if you look at the data, most of the complaints are on the tele-calling side and that is channel agnostic. If you peel that out, you will see that if you have a branch model, complaints are actually low.
R K Nair: Till 2009, insurance companies were offering superior returns relative to banks. With the capital market booming, lots of investment products were sold. But the slowdown has probably caused a lot of discontentment among customers, particularly for investment-linked products. So the regulator suggested many changes like capping of commission, etc. to make them more of an insurance product than an investment product. Further reforms have happened since then and I believe there will be a more healthy and orderly growth. In non-life products, complaints have actually fallen.
Why has the general insurance industry slowed down this year?
General insurance players have been reducing premiums to grab market share. How long can you sustain this?
If you see segment by segment, the scope for penetration is huge. It is important for all of us to see that the business is run in a profitable way so that we are able to invest to capture that opportunity. If you see the penetration number, we are at 0.78 per cent, while China is at 1.25 per cent, Russia 1.25 per cent and Brazil 1.6 per cent. So there is a long way to go.
Life insurance has done well this year, but net premiums are down.
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Amitabh Chaudhry: I don't think life insurance companies have done well this year. If you analyse the data, you will notice that the private sector companies have really not grown. Data from Life Insurance Council for nine months this year, compared to last year, shows that the number of life covered has come down; number of policies, number of offices have come down. The only good news is the life insurance industry was able to clean up a number of things in the last five years, of course backed by the regulator in a very big way. Post January, we can hope for stability and growth because the consumer can look forward to products which are better priced, better structured, more transparent. I don't know whether they are green or brown but there are some shoots and hopefully in the next 12 to 18 months, we will see growth coming back.
Has the industry done enough on innovation? The perception is different.
Everyone says the new guidelines have brought in transparency. But has the regulator been fair to insurers?
The banks-as-brokers model is hitting the headlines. What's your take?
Will the regulator make it mandatory for all banks to become brokers?
Nair: In my view, it is a very good concept. Open architecture is there in mutual funds but banks are not altruistic. They sell products that give them the best commission. To convert a non-altruistic animal to an altruistic animal looks like a rather difficult proposition in my view. You have to bring a mindset change to represent clients rather than companies. The regulator could have a set of incentives and disincentives which will promote better behaviour among intermediaries. But probably banks should not be forced and be given a transition period to become a broker.
Chaudhry: There is this feeling that there is mis-selling in insurance and it will go away when it is opened up. But this notion may not be correct since the broker model has one of the highest levels of mis-selling. Banks have to understand that they can serve customers through this and not merely earn income. But why this open architecture in banks only? Why is it not being talked about in agency, where we have closed architecture? The opposition is on the detailing and not the concept.
Nandagopal: Mis-selling is not the monopoly of any channel and happens across the industry. In the short term, there will be a push back and business volumes will come down. In the long term, it is good. There is a case for an open architecture in everything, but it cannot be mandated at the cost of existing investments and relationships. Options must be made available and there should be a level playing field.
Rau: The open architecture for banks and for individual advisors are two independent subjects. They cannot be linked as the distribution channels are completely different. I don't see how an agent who is a 10th or 12th class pass will represent several insurance companies. On the one hand, banks say that it is complex; and they have full time-employees and have infrastructure to support training and development. Moving to a broking format will reduce the instances of mis-selling by making it mandatory for a bank to offer choice to the customer.
Srinivasan: You should look at the credibility of the insurance industry. Today, many banks look at insurance as revenue generation and don't put in resources and training. Mis-selling via bancassurance is much higher than in other areas. If banks want to enter this space, let them enter seriously, have different streams that are completely professionalised and sell products to customers. Otherwise, the current trust deficit will only get accentuated. Banks are in a powerful position vis-à-vis customers.
What's the industry's take on persistency? Many view Irda's recent move to allow every insurer to decide on their own criteria for persistency as a strange move.
Nandagopal: I think the industry has to have a certain kind of self-governance mechanism. The industry should take steps to improve the persistency. Lack of persistency creates surrender profit, which in turn contributes to the balance sheet. And that is the reason perhaps why people do not invest so much into the profit of the long-term embedded value. But that is a technical matter and people can look into that. By just mandating something, it may not happen. The industry has to make sure that the agents are properly trained. You have convenient technology to make the correction. And the customers should look at the policies as a long-term thing and not just as a one-time investment.
Chaudhry: The regulator has given a very clear signal to the industry about what it wants the industry to do about this problem. They expect the persistency to come up to a certain level. I think the industry should go back to the regulator, saying this will mean that a lot of agents will have to go out of the industry the moment this comes into play. While Irda has withdrawn it, that doesn't mean it can't bring it back.
Rau: It's not an easy decision. If you take a call of terminating an agent who's at a persistency of about 35-40 per cent, you'll probably go down to zero per cent. What we were worried about really is that it'll worsen the persistency. Again exiting branches or locations is not an easy call to take. When you see you have exited a particular location or shut down a branch, your book really suffers, the renewals don't come through. So the other consequences are unintended. We actually felt, in the short-term, this could worsen the persistency. We are expected to behave and make sure these numbers improve.
Why did the regulator take a U-turn on persistency?
Nair: The regulator has set some norms for the agencies. And in my understanding, the agency force is declining. And the regulator has set some very high standards in terms of passing exams and marks that should be obtained. We support the industry's views that we need more intermediaries in the market in all forms like agencies. You have to create a structure where the fellow who is selling insurance should be able to sustain a family. Therefore, a higher persistency is an ideal thing. By our regulatory norms, we've been able to create the management oversight and the governance within the company itself. I am sure higher persistency will drive higher growth and profitability in the long run.
Health is clearly the fastest growing business. Let's bring back the main point about aggressive discounts. Will this strategy work?
Dasgupta: You can't build a business on unsustainable pricing. And if you look at the overall health portfolio, there are only a few segments of the business - corporate, government and retail. The first and the most obvious point is that if you're continuing to get these people on board then you need to continue to provide them good service. If you don't, the trust deficit increases and obviously you won't be able to sustain this growth. If you look at the three segments, the retail portfolio largely for most companies is typically profitable. There are certain challenges in the retail portfolio as well because the regulator does not agree to annual price increases. There is also roughly about 15 per cent medical inflation that we all are aware of. So very soon the portfolio starts getting into zones of unprofitability. That is something that we need to look at (annual price increase).
If you turn to the corporate portfolio, some companies may be making a bit of money. But overall on an aggregate basis, the industry is losing money. I don't think there is any real incentive and disincentive for underwriting. One of the things we've been talking about is that we need to look at some form of risk-based capital model. Even if we come to a very simple solution, for example in group health or in health portfolio if you're consistently running a combined ratio of let's say X, more than 100, put in more capital.
The third segment on health side is again the government portfolio which behaves very similar to the group portfolio. The year the group portfolio is bleeding because of underpricing, the government portfolio also bleeds. And this is a larger risk for the industry and the sponsor.
How do you see the concept of insurance marketing firms, which are some kind of a half-way house between an agent and a broker?
Kedia: We haven't resolved the fundamental issue of trust deficit of the customer but are jumping into a model which starts with a conflict. An agent representing five companies has no liability towards the customer, the only thing that he would do is sell the product of the insurance company that offers the maximum commission. And the regulation on the insurance marketing firms will be far lesser than the broking system. I am worried from the customer trust deficit perspective. We hear a mechanism of push distribution. Addressing the core of 'can we create a pull environment?' can resolve a lot of things.
For all market participants, growth means top line growth whereas bottom line will be automatically taken care of. I think if the industry is obsessed with the top line, we will be led into a lot of other problems. It is very common for insurance companies to say that how can a client expect a full claim settlement when he was so tight in giving the premium. I think we need to get out of this how-we-cannot-settle a genuine claim kind of mindset.
Are insurance industry CEOs obsessed with only top line?
Srinivasan: There should be full emphasis on the bottom line as well. If a company does not make enough profit, there are automatic checks. Yes, we should move to a risk-based solvency so that there is adequate capital consistent with the underwriting efficiency of an organisation and also with the underwriting results they produce. While growth is certainly important, there must certainly be a focus on the bottom line.
Chaudhry: Broker model accounts for the highest number of mis-selling complaints and extracts the maximum amount of money from the industry. But you need to understand why some players are obsessed with top line. If you look at profit and loss, unless you have top line there is no profit. With all the infrastructure that insurance companies have created, a lot of it is fixed. If you don't get a certain amount of top line, there is no profit. And in the life insurance industry, the problem starts with top line. There is no growth, there is de-growth and expenses cannot be cut beyond a point. That is why there is focus on top line.
Kedia: While I concede that all is not good with brokers, we all know that statistics speak what we want them to speak. That is what is happening on the claims side. Let us look at some statistics from the claims side. On non-life property premium, the average market reduction is 85 per cent from the tariff rate. If the premiums on property claims come down by so much, does this mean that India has become very secure and claims have stopped happening? No, we believe that claims denial has gone up.
What is happening in the market is that the number of claims settled has improved. But customers say that when the claim is small, the insurance company is quick to settle the claim. But when it is a large claim, the insurance company realises even if the relationship spans 10 years, it cannot recover this premium and the claim is stuck for ever. So, large claims have become a major issue in the industry.
The second problem is that a customer cannot go to a broker for seeking claims advice if he has not used the broker for placement of services. This is not allowed only in India. We have represented many times and the regulator allowed it partially. But the General Insurance Council intervened and said up to Rs 1 crore, the broker could be involved. But the problem is in the large claims. So we have a serious issue of customers neither getting the claim nor can he seek help.
Rau: On the point that brokers have the highest number of complaints followed by bancassurance and then agents, if you look at the data, most of the complaints are on the tele-calling side and that is channel agnostic. If you peel that out, you will see that if you have a branch model, complaints are actually low.
(Shyamal Majumdar moderated the Round Table)