Regulator nudging us to up our game on cybersecurity: Life insurance CEOs

The leaders of life insurance companies discussed increasing coverage of insurance in India

‘A case for increasing coverage?’ The leaders of life insurance companies discussed this topic at the Business Standard BFSI Insight Summit, 2024, with Business Standard's consulting editor Tamal Bandyopadhyay. Panellists included Vibha Padalkar, managing director and chief executive officer (MD & CEO) of HDFC Life Insurance, Anup Bagchi, MD & CEO of ICICI Prudential Life Insurance, and Mahesh Balasubramanian, MD of Kotak Life Insurance. Edited excerpts:

 

What is the impact on life insurance companies due to the revised surrender value norms which came into effect from October 1?

 

Padalkar: The pain is there and a little bit of disconnect in terms of what it is that as insurers we were trying to do. Because we are giving very long-term guaranteed products. So, having an exit early on could potentially lead to an asset and liability management mismatch. Especially, if interest rates move very sharply. When we look at the bigger picture, it is pro-customer wherein at the end of the first year a customer gets a much larger amount than zero and so on. At the same time, we don't want customers to exit because these are long-term products. So, we will see how it evolves. I think I am very proud of our sector that time and again when we have had these large scale regulatory changes or even Covid, we have come out only stronger. So, these are all growth pangs in my view. 

 

Balasubramanian: It does cause some short-term pain, but we are all beyond that now. First and foremost, we had to rework some of our commission structures with our partners in terms of deferring the commission or looking at a clawback in commission, etc. All of us have done that for various parts of our distribution. We are also looking at absorbing some of it as margins in the business and thereafter, I think one will also have to look at the interest rates that are being offered. Right now, none of us have changed interest rates based on that. But at some point of time, I think we might have to look at the interest rates as well as an industry. Thereafter, we can make sure that the customers feel more reassured with insurance as a sector and they feel far more confi­dent about purchasing policies. In the long term, we believe that it will only increase demand.

 

Bagchi: Customer behaviour among all three of us shows that people don't buy to surrender. The issue about surrender is whether you have a temporary liquidity issue or a permanent liquidity issue. If you have a temporary liquidity issue, we offer loans against policies, which are quite instant and quite easy. If you have a permanent liquidity issue, that is where it could be you have a permanent liquidity and you surrender. You shouldn't lose too much money on that. There should be some penalty because it's a locked-up product. In life insurance, I believe one should not encourage that this gets into the liquidity mode. There is a case where if there is a permanent liquidity requirement, the cost should be low. And all of us are mitigating it through deferred commission, clawback of commissions and all of it. I think in many other cases, like in ULIP (Unit Linked Insurance Plan), it will all settle down. All of us by and large have taken a stance that we are going to protect the customers. Between the channel partners and shareholders, we will adjust and some part, efficiency will also in some way fund it. Anything which increases trust is only good for the sector. Anything which changes the status quo is painful in the short run. Both are true.

 

We can invest in stocks throu­gh everything but when it comes to insurance it is just agency driven. Where are we in intermediation?

 

Bagchi: If you look at life insurance or any other products of locked up nature, you will see that globally, it is mandated by government, like EPFO (Employees' Provident Fund Organisation), NPS (National Pension System), because there is no normal method by which a person will get into an ill-liquid and complex product. One of the things that industry has to do is reduce the complexity. But because of the illiquidity, it is slightly tougher to sell. Protection is fully liquid because till the time you pay premium, you get a cover. There is some pool which is coming from the market, automated. A large part of the protection also is being done through the proprietary sales force or direct channels. So, it is in the nature of the product that we have to put it in context. On operations side, we are using technology reasonably well but we have to do more to simplify the processes even further. Intermediary is an important part of the industry. You cannot take an intermediary out of an industry because it is also an issue of cost structure.

 

Balasubramanian: The insurance sector focuses on long-term planning, unlike markets driven by short term, instant gratification like futures and options and equities. Selling insurance involves a complex, consultative process where customers are encouraged to invest for 10-20 years. This requires face-to-face and advisory selling, especially for products like term policies, annuities, and long-term plans. While non-life insurance is easier to digitise due to its simplicity, life insurance remains largely phygital. Bancassurance and retail agency are major distribution channels. Digitisation is advancing in underwriting, using data analytics, AI, and facial recognition to streamline processes. The pandemic accelerated digital policy issuance, and in the next few years, underwriting will become more AI-driven with improving customer experience.

 

Padalkar: During Covid, the insurance sector paid Rs 60,000 crore in claims without in-person interactions, showcasing significant digital maturity. Behind the scenes, technologies like AI, ML, facial recognition, Meditech, Cloud, and API integration are advancing various processes. While instant technology suits simpler products, insurance, being more bespoke, requires time for policyholders to consider their personal needs, such as family circumstances. A phygital model — combining digital and physical elements — is here to stay globally, offering instant claims, servicing, and frictionless onboarding. The industry is working to reduce fric­tion and streamline processes. 

 

You spoke about data, there was an incident nearly two weeks ago about data leakage from an insurance company. So, how secure is it?

 

Balasubramanian: In the insurance sector, the use of data is still in its early stages, with so much more we can do with it. For example, when I am underwriting the mortality of a particular individual, data on an individual's accident history and medical records could help in preventing fraud and offering customised insurance policies. So, today I don't think we are using data effectively in the industry. I think Insurance Information Bureau of India (IIB) is working at it, and all of us need to start looking at publishing an insurance score. But having said that the industry faces constant threats from cyberattacks, and securing data is top priority. Insurance companies must fortify our systems, implement strict data purging policies, and address vulnerabilities. The increasing value of data, along with regulations like the DPDP Act, (Digital Personal Data Protection Act) underscores the importance of securing and managing data effectively. I think the level of investments, consciousness, and the commitment to make sure that data is secure and data is managed effectively is very important. I don't think there's any other choice but to use data effectively and secure it. 

 

Bagchi: Life insurance is a low-frequency business, so the surface area by which the attack can come also is lower. Number two, on the banking and mutual fund side, actually your money and network can be taken out. Here, you can only take the information. But, we have to be careful because we may have health records which are very sensitive. Personally Identifiable Information (PII) is very sensitive, health records even more so and Irdai now is also nudging all of us to really up our game on cybersecurity. I think it is very critical, again from a trust factor.

 

Padalkar: In the life insurance sector, we are aware and responsible, especially regarding health records. We prioritise data security through practices like containerisation and purging. Being part of large financial groups, we follow additional safeguards. Our regulator has also upped the ante in terms of requirements to ensure customer data is not compromised.

 

One of the key factors for risk management and underwriting is the mortality table, which is prepared by Indian Assured Lives Mortality Table (IALM). This is a decade old and the last time it was revised was in 2014. So, how will you price the risk? 

 

Padalkar: Most of us have been in the industry for two decades, and have our own data and experi­ence at a very sharply defined, on a cohort basis. While the starting point was the IALM, we now analyse data based on factors like geography, profession, age, and even Covid-related mortality. This helps us build accurate pricing models. Ignoring this data and assuming improvements without evidence is risky. Mortality trends are influenced by lifestyle factors, and we regularly engage with rein­surers for global insights to unders­tand at a much defined cohort level and that’s how we build it.

 

The proof of the pudding finally is on your embedded value. If that is positive, then you know that your pricing is more or less right. 

 

Bagchi: I would just want to put it in context as to what is the leverage of the life insurance industry. When you have  Pradhan Mantri Jeevan Jyoti Bima Yojana where you get Rs 2 lakh of cover on Rs 416, you're talking of Rs 500. For every rupee that you put, you get a cover of Rs 500. Even for normal retail, for Rs 25,000 you get Rs 1 crore of cover. That is 400 times without collateral. The leverage is 400. In the group term, which is employer-employee, it is 1000 times. For Rs 1 rupee, you get 1000 times of cover. If we want to increase coverage, all of us are large institutions, we have our own data. But if we see the inflection point of the retail Indian economy, it essentially came after the Credit Bureau. Those were the foundational methods by which really the credit started to come up and it gives you a more accurate pricing power. It also gives you a sense of the overall industry data and you get to pick and choose the thing that you get.

 

The other thing in our industry, which is very peculiar, is that it is a great area for fraudsters to operate. This is because the capital required for fraud is very low. It is very high in savings products, but very low in any risk product like in insurance. So, there is certainly a need for IIB put the foundation of fraud management stronger. Use reinsurers well because they have full industry data. Regulations can nudge them to share the data. It is because you are using Indian data to take Indian risk. So, you must share the data back into IIB and even in the DPDP Act, the regulator can mandate.