'Open architecture will soon be a reality'

Leading representatives of the insurance industry came together at the Business Standard Insurance Round Table in Mumbai to discuss the industry's major problems and find possible solutions

Moderator: The government has been trying to push insurance. Do you think that it has done enough in the Union Budget?

Amitabh Chaudhry: I do agree that the government is and will be looking at life insurance. But at the same time I also believe that our expectation from the government to do something for the life insurance industry in every Budget is a bit misplaced. What it has not done is not imposed further taxes on us.

The government is now talking about a health insurance scheme. And this is the first time that it is tackling some base level social security benefit at the right price when no one is subsidising it for the society in general.

In the absence of a strong underwriting process and dependable claims mechanism, will such a health scheme succeed or achieve the desired objectives?

  Arijit Basu: The government's social security schemes have made a good beginning and what it has done is opened our eyes to the fact that we can give protection to a large number of people. We have issues on whether the pricing was right and we are having discussions with the government because SBI Life apart from Life Insurance Corporation (LIC) was one of the major participants in the life insurance area.

But what it has done is provide a cover of Rs 2 lakh to people, and a large number of people now understand it. We have also started paying claims in the past few months. We look forward now to a fine-tuning of the process and from the insurance company's perspective we can build on this.

Vipin Anand: First, we are fulfilling a need, which in many developed countries is taken care of by the government. Second, there are restrictions on this industry which are not there in any other industry. Half the savings we mobilise has to be invested in central and state government securities, 15 per cent or more is to be invested in infrastructure. The part that can be constituted as profits is also well- regulated. This is unique to this industry; it doesn't happen anywhere else.

So, keeping all these things in mind I feel that there should be a compensatory set-off in tax provision.

If we focus on increasing penetration, the revenue that the government will get from other sources is possibly going to be far more than the revenue which would be generated through service tax on policies or TDS on policies or things like that.

One of the major headlines in this Budget was allowing public sector general insurance companies to list on stock exchanges. But do you think that public sector general insurance companies are in a position to list?

G Srinivasan: I know a lot of people have been asking if it is easy for public sector insurers to list, and my answer is yes. Of course, we will have to go through a process - when an unlisted company goes for listing there are certain requirements like you have to restate the accounts, you have to amend your articles of association, you have to ensure that your board is in line with Sebi (Securities and Exchange Board of India) requirements.

But clearly these are do-able. Today, one problem for the insurance sector is that none of the companies is listed, and insurance companies do not really have a brand.

So, it's time that not only public sector insurers, but private sector insurers also take the lead and come to the market and get themselves listed. They should allow themselves to be scrutinised by the analysts and the public. In that way, we support listing. New India Assurance will be one of the first companies to be off the track as far as listing is concerned.

Can the government really afford to let LIC list?

Anand: I think that is the question to be answered by the government but as things stand today I don't see anything happening in the very near future.

Very few people talk about distribution reforms. How do you look at it?

Sanjay Kedia: There is only one element which is not yet freed, which is on the distribution side: how do you deal with the distribution commission, and costs structures, which remain frozen.

There is also an inherent bias in our regulatory and policy system which encourages owned distribution by the insurer. We need to move from owned distribution to independent distribution to unlock the potential of the sector.

Is there a disappointment that the Budget did not do much for the health insurer this time in terms of tax deduction?

Anuj Gulati: We had seen an increase in the 80D tax exemption from Rs 15,000 to Rs 25,000 after a number of years in Union Budget 2015-16. As an insurance company that sells health insurance policies, I can tell you that less that we collect more than Rs 25,000 of premium in less than 5 per cent of the policies.

Having said that, there is still a need to increase health insurance penetration. And I think the one big segment which still remains uncovered is the whole organised labour market and the micro, small and medium enterprises.

Has the insurance industry done enough in terms of consumer awareness and bridge the trust deficit with your stakeholders?

Anand: As far as LIC is concerned I believe that there was never a trust deficit - we have always been the most trusted organisation in the country. And even as far as the private sector is concerned, there is a fair degree of trust factor now. So trust is not an issue today.

The problem is that there are so many restrictions on agents that the agency channel which even today contributes 80 per cent of the total business is today not very comfortable because of which the attrition rates are growing day by day.

Srinivasan: We keep saying that there is a lack of awareness in insurance. Recently, we had huge floods in Chennai and a large number of people were affected personally and a lot of households had to replace refrigerators, television sets, etc. Three months after that incident, you would have hoped that everyone would have gone and purchased home owner's insurance but that hasn't happened. Clearly, insurance in this country is sold not bought. We need to reach the stage where insurance is bought and only then will the whole thing change.

Chaudhry: The schemes that were launched last year have had a huge reach through the existing distribution channels, and they have worked because there was a crying need for them.

There is also a limitation on the amount of returns we can give to the policyholder, which is limited by investment regulations. On the flip side, we have our own huge distribution costs, mortality charges etc. As a sector, we need products that can compete with other financial products in terms of returns. At present, we are not able to compete with other financial products, due to restrictions in investments.

Simple products sell like hot cakes, which is good. However, why is there a recurring complaint that insurance products are made complex?

Basu: All the companies in the life insurance sector have about 20-25 products. And each company will have at least five or 10 products which are fairly easy to understand. These have converged over the last few years and they are fairly easy to understand.

Is the industry doing enough to institutionalise skill building not only in agency, but in every area?

Kedia: And there is always a lot being done also and there is lot which could be done. A lot of new talent certainly has entered the market but I would tend to agree that not enough has been done.

Anand: This is work in progress; it has been so for the last several decades and it still continues. But definitely some innovations need to come.

Coming to open architecture, banks have been allowed to sell more than one insurer's products but it is not mandatory. Will banks open up?

Chaudhry: Most of the banks are actually asking themselves as to why we should not do it. So it is leading to a situation where at least gradually, say in the next 12-18 months, we expect most of them to actually have more than one partner.

Otherwise, the experience of opening up with a big bang approach has not been very good in a number of markets around the world. This calibrated way is the right way to go.

Basu: If you had made it mandatory then it's not really open architecture. Any kind of regulation, especially a regulation of this nature, has to be voluntarily accepted.

At this stage it requires another two-three years by when, cross-selling of insurance products and other products becomes an integral part of the sales process for bank. Banks automatically will open up. Many of the banks would want to support their insurance arms, but then we should have the best possible outcome for our customers.

Srinivasan: Contrary to my fellow panelists' views, I believe open architecture cannot be left voluntary. From a customer's perspective there must be a choice. Banks should do insurance not because they have big infrastructure but because they must really be interested in it and devote resources and time, and have dedicated people to sell insurance.

Kedia: Any bank which owns an insurance arm would not prefer to have open architecture, and even if it does it would be a compromise system. This is a challenge at this point of time for the insurance market and the economy, and is bound to continue.

But banks will not like to take the liability of being a broker because brokering is a very onerous job. Banks working as a broker is a good idea but it is only going to sell once we have a reform on the distribution side allowing the broker's remuneration to be freed and left to market forces.

About health insurance specifically do you agree with this that there is still a huge lack of innovation on the part of the industry?

Gulati: Rome was not built in a day. We have added about Rs 4,000-5,000 crore of health insurance premium on a base of Rs 22,000 crore - this is a segment which is growing upwards of 20 per cent. In our lifetime we will solve this problem and in the next five-six years we will start seeing products that will reduce wait period significantly, products that will come out and focus on segments like diabetics or hypertensive alone, etc as companies are building up data.

In insurance, just about 2-3 per cent of the business comes through these digital channels. So why is this figure so low?

Basu: What is now happening is that people who are buying purely online and going ahead are the financially literate class in the metros and there is some amount of sales happening through that. But I would look at the issue a little more broadly. For example, digitisation is also applicable to your processes and the way you make the sale.

Till the time life insurance will continue to be somewhat of a push product needing customers, looking for some kind of financial advice, I think it will take time.

Chaudhry: We are a leader in the online space by a margin and please understand that what is being sold online is mainly term insurance where the overall premium size tends to be obviously small as the product is typically a pure term policy. And if you compare market share based on the premium then automatically it tends to be understated because the number is smaller. In the next five years, completely new ways of selling will emerge, and completely new kind of products which cater to that space will emerge.

Srinivasan: In non-life insurance, it is slightly different. Only two-three per cent of customers buy non-life customers directly from insurance companies. What we do is enable our intermediaries, issue policies digitally, or brokers issue policies digitally. Almost 12 per cent of our policies get issued online so in that way it's a large number.