Brief overview
It is nearly seven years since the Indian insurance market was opened up. In life insurance, we have seen unprecedented growth which is continuing. By the end of the financial year 2007-08 we are likely to see more than twenty life insurance companies in India. A frequently asked question is: what is the optimum number of insurance companies that is ideal for India's needs? Considering that life insurance penetration is 3% of GDP and that one is aiming at say 7% or 8% of GDP, that vast sections of people are still not covered by life insurance and large geographical areas are untouched by insurance, we can say that we have a long way to go and that there is room for more insurance companies. The annual 'new business' growth has been around 100% for the last three years and it looks likely that such a growth will continue for some time. That such an incredible growth, to a great extent, has been due to ULIP products is another matter. A significant part of 'current issues' are consequent to such high growth. With current and projected growth of the Indian economy at 9% for the foreseeable future, domestic savings rate can be expected to grow from, or at least be stable at 23-24%. It follows that unless the sector makes major strategic errors, growth of life insurance business will remain high.
Predicting a company's future over long term is difficult enough; attempting that for a sector in a market is much more risky. Yet when one discusses 'current issues in life assurance (CILA)' one must devote thought to market-related strategic issues and directions and to mid-term and long-term solutions. In a recent special issue of Harvard Business Review on 'long term planning' its editor concludes his observations saying: '…the art of managing for the long term is the art of making the whole greater than the sum of its parts'. I believe this is apt for our life insurance market. It is necessary to create a market that fits the HBR editor's comment and one needs to keep this in mind when analyzing current issues and identifying solutions. It is also said that 'building the future is really about building the present……..and a …. leader must be careful to stay close to the front line-the people who deal with customers and markets' (Maurice Levy-HBR). In this context let us look at the industry issues in 'building the present' and what steps are needed to resolve them and take the industry forward in a wholesome, healthy and customer-oriented manner.
It is essential that the life insurance market functions with 'optimum efficiency' and ensures that resources are allocated efficiently, 'ensuring customer choice and value' (Skipper). An efficient market will have innovative and constantly improving products, predictable and affordable prices and transparent practices. But no market is perfect and our life insurance sector has more than its share of imperfections. In a perfect market a regulator is perhaps not needed. Information asymmetry between the three viz. insurer-intermediary-customer is a major imperfection that manifests itself in several of our operational issues and regulatory interventions. Dr. Harold Skipper notes: "…within a competitive insurance market government / regulatory interventions are desirable only if three conditions exist:
a. Actual or potential market imperfections exist
b. The market imperfections could and do lead to economic inefficiency or inequity
c. Government (regulatory) action can ameliorate the inefficiency / inequity."
All the three mentioned above apply to our life insurance market. The industry can do continuing introspection, as is being attempted in this conference, and reduce if not eliminate imperfections. What we call 'issues' are actually the visible manifestations of imperfections.
Distribution
For the continued growth of the industry distribution is the key. The nature, efficiency, reach, cost and mix of distribution are vital and they pose some of the difficult challenges today. Imperfections abound! Let us examine some of these.
1. Individual Agent:
As in other areas, India tends to keep close to tradition. For a long time, individual agent has been the main, and often the only, distributor of life insurance. Every new insurer has had to build this as the dominant channel for distributing life insurance products despite realisation that agency channel has major drawbacks and inefficiencies. The total number of agents now is reported to be more than 18, 00,000 and recruitment is going apace as if there is no tomorrow! Issues relating to recruitment in large numbers, pre-recruitment training, examination, productivity, attrition, acquisition costs, selling practices etc. have been issues discussed often at the Council and with the regulator. The industry view is that stipulations regarding the compulsory minimum number of hours of training at an approved institute followed by examination did not seem to add value and the matter of training leading to examination should be left to insurers. Competition would ensure good training because ill-equipped agency force in any company would hurt their growth and well-being. Industry view is that the desired purpose of professionalization of distributors would be achieved through strict monitoring of examinations without having to go through a stipulated number of hours of class-room training. We await the outcome of the Council's representation.
2. Bancassurance and Corporate Agent:
Insurers have entered into arrangements with corporate distributors through 'corporate agency' contracts. The so-called bancassurance too works more or less through this model because the Bank is appointed as a corporate agent, though some arrangements follow a 'referral mode'. IRDA had issued some sound guidelines particularly to ensure that a corporate employee involved in selling is trained as a normal agent would be and followed good selling practices. There have been reports of up-front payments to a corporate agent towards reimbursement of expenses, servicing charges etc. Rationalisation is needed keeping in view the realities on ground. On banks selling insurance there are differing reports as to whether the sales are concluded by banks' representatives or insurers' representatives while the bank just provides the lead, platform and persuasion. Ideally banks' representatives, duly trained, should be conducting and concluding the sale. This may yet happen.
ULIP products
Unprecedented growth in New Business Premiums began when most insurers started selling ULIP products aggressively. During the initial months everybody seemed happy with the rapid growth in sales of the new product and its variants. Then the regulator stepped in and had a good look at the ULIP sales from all angles, possibly taking into account issues raised by the mutual funds sector. The regulator raised several issues and after considerable discussions a set of ULIP guidelines was issued. Among the more important points were: stipulation of minimum three years lock-in period, minimum life insurance cover of five times the annual premium etc. Earlier the industry had adopted a voluntary code of 'benefit illustrations' covering the range of assumption of returns to be used. This range was fixed between 6% pa to 10% pa. In the recent past many complaints have surfaced that companies were showing benefit illustrations with very high potential yields which may not be realistic. This has been a matter of concern for the regulator. Some of these have been addressed under the 'code of best practices' implemented by the Council. One looks forward to the continued prevalence of good practice in this area. There is a requirement that Appointed Actuaries should certify the benefit illustrations, particularly in ULIP cases. Transparency of charges in ULIP, including a suggestion from some quarters to standardise charges (a la MF), correct selling practices etc., are some key issues that require urgent attention. No doubt ULIP will stay and grow. It is necessary to do so with discipline and transparency. There is a need to create higher awareness about the product and its features. When we do that adequately, the uninformed and biased articles in the media can be expected to come down. Suffice to say this area requires priority attention.
Awareness of life insurance
It has been argued that insurers advertise their services and products and in the process increase awareness. This statement is partly true. There is a need to create a broader awareness about life insurance in all geographic areas in India through specific collective campaigns. This is an important precondition to developing insurance and increasing penetration. The Council has taken up a project to do this and significantly IRDA has agreed to give all support including financial support. It may not be correct to assume that awareness is lacking only in rural areas, small towns and among the less educated persons. Even in urban areas a vast segment of persons seem to have erroneous perception or impression which needs to be corrected. Negative awareness, such as that based on misinformation by competition desiring to increase their share in the domestic savings pie, needs early attention at industry level. Here again the Council has initiated some measures that will address this long-term issue.
Mis-selling
During a recent meeting of the Council one important part of the ULIP code of conduct relating to 'benefit illustrations' was discussed. After considerable discussions it was agreed that a generic illustration would be given to the proposer at the time of sale and an illustration specific to the contract would be given along with the policy document. This was a positive conclusion in an issue that was undecided for quite a while. Even as the leaders of the industry agreed to this, examples of illustrations and brochures / fliers showing very high returns, in English and regional languages, were reported to be in circulation. It has been reported that regulator has been concerned about prevalence of some misleading illustrations and of mis-selling. This, if true, is a matter of worry. Each insurer and the industry as a whole, should place larger interests ahead of narrow gains, adopt a policy of compliance in selling practices and ensure that members of field-force do not attract criticism of mis-selling. In the medium-to-long term, such a practice would cause pain and embarrassment at the consumer grievance redressal forums and adversely affect credibility of the industry. Industry needs to attend to this at policy level and also at operational levels.
Industry Data
An integral part of development of a sector is ready availability of reliable information, both as statistical data and as fuller details of products, service parameters, etc. Information is an important factor of credibility in impressing upon the 'powers-that-be' the industry's submissions on policy direction at the government level and regulatory level. In a competitive market, availability of data of integrity keeps government, public and media accurately informed and keeps companies on their toes. Information assists greatly in timely diagnosis of any potential issues looming in the horizon and thereby helps to take early corrective steps. As of now we have the annual report of the IRDA which provides some important data. These are available once in a year and that too after a lapse of nearly 9 to 12 months. New business data is made available by IRDA through their monthly journal. We need more detailed information more frequently. In most countries this task is undertaken by self regulatory organizations that act as support to the industry. The Life Insurance Council has made a beginning to collect, collate and publish data in such frequencies and accessibility as may be determined by members. Although members have had varying views on this subject it is expected that the initial set of data will be made available in this quarter and regularly thereafter.
On this subject the Council and the Institute of Actuaries of India are expecting to complete the working details of collection and analysis of data on 'mortality and morbidity' with a view to publishing the required tables and conducting research that will be useful to the industry. The issue of non-availability of data and information is a major one. It is satisfying to see that despite severe competition in the field, insurers are keen in getting this started as they readily see the long-term common good in the availability of market data.
Capital and Solvency
When opening up the sector, Government set high barriers of entry to discourage casual players with short-term objectives, from entering the field. The minimum paid up capital of Rs. 1 billion, the solvency ratio and an additional safeguard through requiring 150% of the solvency margin, have ensured that entrants are all serious major players. Leading global insurance companies have entered the market in partnership with the top names in India. With high growth, promoters have had to inject capital regularly and the current levels range from Rs. 300 Crores to Rs. 2,500 Crores and the total capital employed currently is around Rs. 9,000 Crores. Many have announced plans to inject more in the immediate future to meet increasing solvency requirements due to high growth. Views have been expressed whether such high levels of capital are indeed necessary. After all, return on capital is also built into the pricing. Some have suggested review of the additional safeguard of 150% of the solvency ratio prescribed by IRDA guidelines. In the wake of banks adopting Basel II norms, it is timely to consider a similar approach for insurance business. Alternate capital, hybrid capital etc have been suggested. During informal discussions, the regulator's office has recognized the alternative approaches but seems to think it premature to take up this issue now. They are reportedly in favour of gradually moving to 'risk-based capital'. This is an area in which the industry might wish to do some work sooner than later, and conduct analysis of the alternatives and prepare a well-researched report specific to the Indian market.
Manpower
It is perhaps true that no promoter expected such consistently high growth for nearly three years running. Plans have had to be redrawn. This growth involved marshalling additional resources in terms of capital, infrastructure and above all human resources. With surge in demand for quality human resources at all levels, compensations have increased substantially. Companies are very active at campus recruitments. All those who complete an MBA are reported to find good placements irrespective of the stature or rank of the institution. Apart from general candidates at entry level there is also severe shortage of specialists such as actuaries, accounting and financial executives, legal personnel, HR executives etc. For the candidates, while compensation is perhaps the key differentiator, factors such as standing, reputation, rank in the industry, HR environment etc too are significant factors in decision-making. Companies are finding innovative ways to retain trained staff. This situation has encouraged several institutions to offer short-term professional courses in Actuarial Science, Finance and Accounts, HR etc. Many institutions and universities have started special courses in Insurance and Risk Management. It is necessary for leaders of the industry to assist and promote institutions of learning in all areas of insurance so that companies get employees with some knowledge and familiarity. This will reduce learning-time at work.
It is to be examined whether for entry level positions in insurance a degree or a post-graduate degree is an absolute necessity. As a good number of school-leavers may not be able or willing to pursue higher studies, companies could consider recruitment at 'plus two' levels, give a short training and deploy. This approach will give quick access to a very large pool of persons and it could be an important initiative. I see from reports that some companies have already started moves on these lines. Some years ago the general insurance sector and life insurance sector had started dedicated vocational insurance education in Secondary schools across the country. It supplied a good number of very focused and knowledgeable candidates about whom there were excellent reports. However for some external environmental reasons that programme had to be abandoned after a few successful years. The need to develop skilled manpower for the insurance industry is a major challenge today.
Some more issues
There are, as there will always be, several other issues that require attention. Impact of the AML guidelines, efforts to establish market-related benchmarks for comparing performance of ULIP schemes, proposed amendments to the Insurance Act, adoption of AS 30 and AS 31 for life insurance sector, issues relating to Income Tax, Service Tax particularly from the angle of avoiding tax arbitrage between life insurance and other segments of the financial services sector, suggested harmonization of wordings of policy bond and proposal form etc., are some issues that are on the table for active consideration.
The matter of trading in life insurance policies is of importance. An issue is before the Supreme Court and therefore it may not be appropriate to express any views now. Suffice to say that the matter needs discussion at industry level. Incidentally the latest issue of Business Week contains an interesting cover page article on this subject under the heading
"Death Bonds". Makes interesting reading.
In the last two years the volume of Pension business written by the life insurance companies has increased manifold. Pension assets have grown from about Rs. 4,000 Crores in 2005-06 to nearly Rs. 40,000 Crores in 2006-07. There is no doubt this part of the business of life insurers is growing at a fast pace. This strengthens our case for participation in any new pension system that the government may establish. This is an important part of our industry's development in the last two years.
Concluding remarks
There are several issues that require attention and resolution. This paper has touched upon some of those. Many issues can be resolved within the industry through collective efforts possibly through the Council. Some would need the attention of the regulator and the industry would do well to present their views collectively. Some others, structural issues, need to be articulated adequately and solutions will perhaps emerge over time. Market participation in making key regulatory decisions will be strengthened through such discussions.
It is therefore very encouraging that the current seminar has chosen the topic 'current issues in life assurance' since only through such interactions that issues will get attention and resolution.
Pune
August 2, 2007
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