Life Insurance: The Noble Business

This interview was first published in the IIB Bulletin, 2014, Vol. 1, Iss. 1, pp-3-4 

https://iib.gov.in/IRDA/Articles/IIB%20Bulletin%20Q1%202014-15.pdf

Mr. K S Gopalakrishnan, a fellow member of the actuarial bodies of Canada, UK and India, an associate of the Society of Actuaries (USA) and fellow of the Insurance Institute of India, has been in the Life Insurance Industry for over 30 years. He has worn many a hats during this journey; Appointed Actuary, CFO, Underwriter, product developer, and now the CEO and MD of AEGON Religare Life Insurance Company and a member of the Council and Vice President of Institute of Actuaries of India.

His passion for the industry is evident in his gleaming eyes and the pride with which he talks about his involvement with the Mortality studies of Indian insured lives (1994-96) for LIC and the product innovations. In an interview with Dr. Nupur Pavan Bang, Head- Analytics, Insurance Information Bureau of India, Gopalakrishnan talks about the “noble business” of Life Insurance and its future, in India, according to him.

You have been credited with the innovation of the unit linked product (ULIPs). Does it bother you that many people lost money because of this product?

An entire business model revolving around unit linked insurance products was launched in March 2001. It changed the industry completely. The product brought transparency, liquidity and flexibility to customers. The sales process was backed by interesting features through customized benefit illustrations and the free look option.

Over the years, many challenges emerged largely related to sales process and customer understanding. The sales process sometimes involved positioning the product as a short-term product (say, three years) indicating consistent superior market returns. I am not sure if every customer fully understood the market risk associated with stock markets and the interest rate movements. This also leads to the question of whether unit linked products are for every customer segment or not. There were challenges.

When a weaker stock market started hitting, customers started comparing their policy fund values with premiums paid and then came the complaints. The product was good, is still good and will deliver customer value as long as customers realize it is an insurance-cum-investment product that has to be held for the long-term.

You pioneered concepts such as online Life Insurance, unit linked with investment guarantees and free looks in India. What has been your experience with the regulation? Do you think excessive regulation impedes growth and innovation?

I view these things as a cycle. This is an evolving market from a regulatory architecture viewpoint. The market opened up only in 2000. Everyone is learning along the line, including the insurers, management, employees. Many are new to life insurance. You talk about long-term business, and the longest experience that people have in some of the companies [private sector] in this industry is just about 10 years. I see this as a game where everyone learns and then changes.

When the opening up happened in 2000, there was complete freedom in terms of product design, pricing and largely even how distribution evolves. Towards the end of first five years of opening up, challenges around customer perceptions started emerging. To respond to those challenges, boundaries were created for product innovations in savings/investment-cum-insurance category, probably for the right reasons by the regulator.

There is still a huge scope for product innovation in the protection space. You can develop products for segments which are not yet offered insurance. Lot of data and research backing is required.

Do you mean micro-insurance? Or do you have any other segment in mind?

One is by gender (women, working women), they could be targeted. Second are health conditions which industry doesn’t rate. For example, conditions like certain types of diabetes. For every risk there is a price. Price may be unacceptable, but then we should find ways to hedge the risk and offer solutions to customers.

What about Mental health insurance? There is no such policy in India which caters to this. Do you see it as a potential area?

I am not sure. It may help if government plays an active role in this space so that more people have access to the related health care.

India has the highest savings rate in the world at around 30% of the GDP. According to 2012-13 data published by the Reserve Bank of India, a large part of it, around 65%, goes into physical assets and about 35% goes into financial assets (currency, fixed deposits, stocks, insurance, pension, etc). Life Insurance accounts for about 20% of the financial savings. In spite of this, the penetration is low in India.

When someone buys motor insurance, nobody asks, “what will I get on maturity?” In life insurance, almost everyone asks that question. As an industry, we need to answer that. People of India are skewed towards saving and investment products. This is the reason we still see life insurance positioned around savings and investments.

Also, collectively, the industry must reach out to people, campaign, and tell them the importance of insuring against dying, living longer and against falling sick. In 2008, we ran a campaign, “kum insurance lene ki bimari (K.I.L.B.) (the disease of under insurance)”. But we did not have the right distribution channel to translate this message into results. In 2009, we launched online term insurance product because we realized that there is a customer segment that wants to buy life insurance only for pure risk protection and would like to do that directly with the life insurer. I am happy to see that a large part of the industry players too have moved in this direction.

In my opinion, Insurance penetration, Premium to GDP, is not the right measure for life insurance. A right measure could be the amount of risk coverage in-force as a percentage of GDP.

Is insurance density a better measure?

The amount of risk cover in-force is perhaps a meaningful measure i.e. what is the total sum assured or death cover of the population and what is the GDP for the country?  If someone aged 35 is working today, they should be covered for 15-20 times what their annual earnings is.

A person earning Rs 50,000 month and holding a savings-cum-insurance product paying Rs 2,000 premium every month for Rs. 2.50 lakh sum assured is perhaps an inefficient and inadequate insurance cover.

Would keeping aside a small percent of the revenue or profit for awareness help? Securities Exchange Board of India has mandated an Investor Protection and Education Fund. Would a similar initiative in Insurance be helpful?

This would surely help. Awareness of life insurance should be spread. Advantage that Life Insurance has over Mutual Funds or equities is that life insurance is always viewed as a mass market product category. Life insurance reaches even people at the bottom of the pyramid. Life Insurance has more touch points than many other financial products and running a campaign should be easier.

Is there anything specific that the industry can do to capture the market? The section of society which actually needs insurance is not getting it.

I believe Life Insurance is the only business where, when the customer is no longer there, we go and pay a financial benefit. It is a noble business. In the last few years, things have become complicated. The brochures, the policy document, the terminologies, are all very complex. Very few customers read the material that is sent to them. The purchase process as well is complicated and has become time consuming. So simplifying things is important.

At AEGON Religare, as an organization, we want to try and do it [simplification] as an initiative this year.

For the period 2000 to 2010 we saw a steep growth of 30% in the life Insurance sector. But from 2010 to 2012, the growth has come down to 3%; lower than the GDP. How do you see the growth in the next ten years?

I think it will be modest for few years and then start picking up. Life insurance is a retail business. There are certain products which cater to groups or businesses, such as employer-employee term insurance, gratuity etc. But largely, it is a retail business. People like to sit across a table, understand the product and then buy. Agents play an important role. There are other channels, though agents still have the dominant share.

Training the agents is a big challenge, especially in an environment which is volatile. Things keep changing, product design keeps changing, tax requirements change, and agents need to be re-trained. People get disinterested and feel that there is no stability. There is some nervousness in the front line. That is one reason the growth has been muted.

Second reason is that in the past the industry grew on back of lot of ULIPs selling, where expectations were created about superior returns. Now, with change in product mix towards guaranteed benefits products, industry sales growth will be moderate.

Stability for the next 3 years in products regime and growth of GDP will bring back growth to the life insurance market.

Is the industry well poised to manage risks? The Banking sector in India is going through an era of high non-performing assets. Do you see an Asset Liability mismatch (ALM) happening in the Life Insurance industry in the future?

There are two types of risks (apart from operational, litigation, strategic, etc.), one is insurance risk (e.g. mortality, morbidity) and the other is investment related risk (e.g. ALM).

I don’t see mortality/morbidity as a big risk, because by and large life insurers are good at pricing this risk and underwriting this risk. Also, there is reinsurance which is for the entire term of the contract. It could also be a one-time event like a catastrophe. I think industry is good at quantifying it [the associated risk] and transferring it.

ALM risk certainly exists as everyone is writing liabilities that are of long-term. For example, products with policy term of 15 years and longer are quite prevalent. The reality is also that there are not enough investment avenues that match the liabilities by duration and cash flows. If after a few years, interest rates start dropping and reach say 2% and there is a big block of existing business, then you will see the problem starting. We are aware of the risk. We can run models quantifying the risk and set aside a reserve for the risk. But, the risk still exists.

It is an issue for the industry as there are not enough hedging avenues. This is one of the reasons why private players moved to Unit Linked products. In Unit Link we kept the mortality risk but transferred investment risk back to the customer. But I hope things will change as the regulator considers investment in derivatives for longer duration. The financial markets too have to develop depth.