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
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.
