Indian Insurance Industry - Key Issues and Challenges - Part - 2

Key Issues and Challenges

Part 2

Indian Insurance Industry: Reaching out to Exponential Growth


While a range of economic and financial reforms have helped the insurance sector grow, there remains a host of challenges which need to be addressed for harnessing the full potential of the sector: Key Challenges a. Lack of Consumer Awareness: In spite of opening of the insurance sector for private participation, the levels of insurance penetration and density are very low. The main reason for low penetration is lack of awareness about the insurance products and its benefits. It is important (and IRDA has been working on it) to educate general public about the benefits of insurance, how to select an insurance product and to educate them about the grievance redress mechanism in case they are not satisfied with the services provided and have a complaint against financial service providers.


b. Negative Consumer Experience and Perception: One of the critical levers is to manage consumer expectations and service. The industry has been plagued by perceptions of slow, unreliable and at times harassing consumer delivery. A lot of new entrants have worked at addressing the barriers through their consumer interactions and working models, the same needs to be strengthened across, especially with the onset of social media. Insurers should identify areas, which are most vulnerable to frequent critical comments, analyze the reasons for such underperformance, and take steps to enhance the service delivery.


c. Poor offtake of micro-insurance- Micro insurance (life, disability and health) coverage of the economically disadvantaged sections of Indian society is dismally low. Several factors have impeded the growth of micro insurance in the country. Most customers in the target segment have low financial literacy and are unable to view insurance as a risk mitigation tool. Further, lack of adequate products, poorly designed policies, lack of education, mis-selling through inadequately trained agents and rejections during claims settlement has led to lack of trust with this customer segment. The feasibility of various products is often lacking or low in quality. On the distribution front, limited incentive on a low premium products makes it difficult to cover operational costs of reaching out to the customers. For micro insurance to succeed, demand has to be created through building awareness among the target segment, creating simple and need based products and most importantly, simplifying the processes of underwriting and claims management.


d. Agency led Distribution Model: With reduced commission structures, high attrition rates and dwindling perception attractiveness of agency as a career options, the agency channel is under stress. This has led to reduced dependence on the model and subsequently significant reduction in number of offices in the private space.


e. Distribution Costs: Life insurance companies spend a significant portion of their budget to set-up and streamline the operating model and the distribution process towards business acquisition. Distribution is not only the forefront of the operations but also forms a large proportion of the operating expenses. Accordingly, inefficient agent recruitment and high employee attrition increase the operational costs. For insurers to realize the highest value from distribution, they must define an operating model which supports a multiproduct, multi-channel distribution model that compliments an insurer’s revenue objectives and profit margins.


f. Lack of Alternate Distribution Channels: While banc-assurance is expected to drive near term growth and online holds a promise for the future, agency channel continues to dominate the channel mix today. There is an urgent need to take initiatives to revamp the agency channel to become cost effective and in tandem, identify alternative networks that complement the existing channels.


g. Lack of Product Innovations and Customizations: There have always been a few life insurers who have sought to identify niche markets like women-oriented products, worksite marketing, children future protection markets and pension markets. But these have not been happening on a consistent basis. The industry’s business model needs to constantly innovate and evolve. However, off late this is witnessing a change with increasing number of insurers looking to introduce new and innovative products aimed at meeting evolving customer needs.


h. To highlight the point further, Pension and retirement products is a big gap in the current product portfolios. While the demographics (percentage share of 60+ is expected to go up to 12 per cent by 2030) support the need for a product, it has remained largely under-leveraged by consumers and marketers alike on account of a. low consumer awareness and thus perceived relevance b. Difficulty in providing long term insurance guarantees c. long gestation period of returns etc.


i. Intense Market Competition: The Indian insurance industry is gradually evolving and thus remains highly competitive. The insurance public and private players compete on the basis of reliability, financial strength and stability, ratings, underwriting consistency, service, business ethics, price, performance, capacity, policy terms and coverage conditions. In addition, the company also faces competition from other financial institutions such as banks, securities firms etc. which have started cross selling products that directly or indirectly competes with various insurance products. Given the inability of general insurers to differentiate on the basis of product offerings along with the lack of customer awareness towards product features, the competition will mainly be price led, which will further impact margins for the sector.


j. Human Resource Challenge: Keeping attrition in check and ensuring availability of continuous talent is a key task. Further, the insurance market is now filled with players, who are mature, globally prominent and big players, each of them has ability to influence the market which is likely to further up the challenge in this area.


k. Regulatory Challenges: As the competition gets acute, the customer becomes more vulnerable to the vagaries on market environment. The regulators with a view of driving transparency, consumer protection, simplifying portfolio and creating a long term sustainable eco-system and business model have driven a few frequent changes in the regulations. Some of the key changes which played a dominant role in charting the course for the industry were the introduction of cap in charges on linked products, restrictions on pension and index-linked products, and persistency norms for agents; while the general insurance sector was affected by price de- tarrification and motor third party risk pooling arrangements.


E.g. IRDA had announced rules pertaining to capping of expenses -- no insurer should spend more than an aggregate 10% of all first year premiums and 4% of all renewal premiums on policies granting deferred annuities for more than one premium; 5% of premiums received during the year on single- premium annuity products and 1/20th of 1% of the average of the total sums assured by policies excluding single-premium policies. While it aims to protect long term interests, in the short run, it will put pressure on insurance companies to cut costs by innovation, digitization, reducing customer acquisition costs and reducing turnaround time. [Source: Economic Times, June ’15 Report]


k. Volatility in Global Financial Markets: Though, coordinated actions by several governments did restore some confidence in the volatile global markets, market participants remained jittery. As a result, whenever there is a withdrawal of foreign portfolio investments from Indian equity and debt markets, investment returns booked by insurers are likely to suffer.


l. Costs and Profitability: Insurers’ fascination for top line growth at any cost has resulted in inefficient operating models and hence inferior operating ratios as compared to global benchmarks, in both life and non–life. Clubbed with high claims costs and regulatory constraints (as discussed above) have led to tightening of insurer margins, impacting category profitability.

m. Adverse Claims Ratio for Non-Life Insurance: The sector has been making significant underwriting losses from its core operations since 2007. In 2014- 15, the net incurred claims for the industry rose 12.3 per cent to INR 55,232 crores against INR 49,179 crores in 2013-14, stressing thereby the underwriting profits. Within Non-life sector, the health and motor insurance lines, which are also the biggest and the fastest growing segments, had the highest claims ratios of 97 percent and 77 percent respectively

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Indian Insurance Industry - Key Issues and Challenges - Part - 2

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