The penetration (annual premium as a percentage of GDP) of non-life insurance in India is below 1 per cent. Even though, it has been growing and has risen from 0.56 per cent in 2001 to 0.93 per cent in 2017, viewed in the context of the global penetration including in emerging economies and size and growth of India’s GDP, it is abysmally low.

In fact, roughly 50 per cent of the total non-life insurance premium is represented by motor insurance. The sharp rise in penetration in 2017 has been enabled by the crop insurance push of the Centre.

Barring a couple of exceptions, all the players in the non-life insurance industry are making underwriting losses — incurring a loss from the core business of insurance.

The profits delivered, if any including by the public sector insurance companies are generated by the investment income.

The underwriting losses became a reality after de-tarrification in January 2007 (which mandated a minimum premium).

Earlier all the companies except new entrants were making underwriting profits, of which a significant chunk was held as reserves. The investment income comes from capital, accumulated and IBNR reserves.

The affirmative action of de-tariffication was intended to transit the regulatory regime from directed pricing to free market competition. Insurers were allowed to price insurance policies (except motor third party) on their own assessment of risks.

Unintended impact

Unfortunately, this had an unintended consequence of “race to the bottom” for acquiring size, market share and leadership. While customers may benefit from de-risking below the marginal pricing, the shareholders, uninsured and society at large seem to be paying for the predatory pricing.

Solvency issues have surfaced and the shareholders including the government in case of public sector companies have been called upon to fund.

Affirmative regulatory action has had several unintended consequences. The subsequent initiatives including prescribing adherence to burning cost in pricing, (equal to marginal cost) haven’t brought about the desired outcome. Another unintended consequence has been an inadequate expansion of the industry across segments and geography, undermining the fundamental philosophy of de-nationalisation.

Interaction with industry professionals about enhancing the reach, brings out the oft repeated suggestion of prompting legislative action of making insurance a non-discretionary expense. In fact, deeper analysis would reveal that a major part of the non-life insurance premium comes from risks which are required to be insured as a result of legislative/lender directive — crop, motor, workmen compensation, fire, marine, third party liability etc.

Right from the beginning this industry has been luxuriating on mandatory insurance and corporate risks — ‘lazy insurance’. Every insurer chasing the same customers has culminated in pricing warfare, which accentuates with every new entrant in the market. Further, tweaking of regulatory directions may not help the industry, which is drifting towards consolidation and not expansion.

India’s GDP per capita has been growing over 7 per cent for the last two decades. Shortly, India will join the ranks of middle income countries with an average per capita GDP of $2,000. The size of aspiring India is expanding fast. Refrigerators, TVs, motor bikes, mobile telephones, houses are being acquired by a larger number of people every year.

The millennials travel a lot — for work as well as leisure. This has opened up new opportunities of derisking individuals through a bouquet of customised householders policy, health cover, travel and accident insurance.

Design revamp

However, tapping that potential warrants a different kind of organisational design, business model and regulatory regime. The product basket, distribution channel, selling techniques and ‘go to market’ and regulatory design framework must undergo a comprehensive re-engineering.

The current business model of focusing mainly on the bulk and mandatory insurance through a network of brokers, auto dealers and corporate agents fails to reach the mass market. A different distribution matrix is needed. Organisations will have to become flatter and leaner, and more nimble footed with a brigade of ‘feet on street’ for the last mile human interface.

The refurbished product basket must be easy to understand and offered at affordable terms. The fine print in the policy contracts must be written in simple English which is easy to comprehend and apply. The customer service has to be so upgraded that the likely trauma of the unfortunate event, is reduced to a discomfiture duly comforted by a friend called insurer.

India is by and large networked with high speed digital waves. It is the second biggest user of the data (over 11 Gigabyte per user per month) in the world. The insurance sector, in particular life insurance, though a pioneer in the adoption of technology, has since lagged behind entertainment, consumer industries and capital markets. A greater push towards digitization will bring down the cost of distribution and customer service. Thus reoriented organisational design can make underwriting the risks of the masses a profitable business.

An ‘all digital’ start-up non-life company recently entered the market with such an approach. Unfortunately it fell into the trap of over compensating intermediaries and pricing even below the aggregate marginal cost of a large stock of risks, in search of quick success and valuation of the platform. The expected ‘network effect’, may not deliver the aspirations of the investors, adversely impacting financing of futures losses.

The time is opportune for the regulator to step in with ‘development cap’ and coordinate with industry managers to usher in new thought processes of insuring India as well as Bharat.


Source: The Hindu Buisness Line

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