In the last one year, as we were grappling with economic slowdown, the insurance industry saw many reforms. Where is the industry headed?
The long-term growth story is intact but in the short-term, business models will undergo changes. Many companies are talking about going public, which will make valuation of companies very nuanced. This, in turn, will necessitate business models to undergo changes in order to focus on optimum capital utilization and persistency.
T.R. Ramachandran MD & CEO, Avivia Life Insurance Co. Ltd
The focus on persistency sharpened after the slowdown. Earlier, insurers focused on first-year premium, which was exposed during the slowdown. What are you doing to ensure persistency?
During the initial days of telecom boom, the systems were complex. The calls were expensive and customers couldn’t make sense of the bills they got. But it became simple as penetration increased. Insurance penetration is around 4% of the GDP (gross domestic product). If you dissect this number further, you will find that most people are still under-insured because insurance is still seen as tax arbitrage. People need to understand the importance of insurance. The products have to engage with the customers so that they see insurance as a long-term tool.
Distributors are incentivized to sell insurance. Has your incentive structure undergone a change to ensure that agents also focus on persistency opposed to just selling insurance plans?
Yes, for child unit-linked insurance plans (Ulips), we have commissions that are staggered across the policy tenure. But we realize that persistency is maintained when insurance is linked to an end use. For instance, our child and pension plans have favourable lapse ratios because a customer has a goal in mind when he begins investing. In case of a child plan, we tell the customer how the policy will fund the child’s education in case of the death of parent and how on maturity, the proceeds could be used to fund higher education.
We also check with customers if they have understood the terms and conditions. We have simplified some caveats by encapsulating them at the beginning of the policy bond. I have to admit that in case of about 4% of our customers, we don’t go ahead with the sale as they tell us that they did not understand the terms. But that is a small number compared with the rampant mis-selling the insurance industry is accused off.
Most Ulips now come with guaranteed additions. Does this trend indicate a focus on persistency too?
Yes. Most policies now come with guarantees. We offer loyalty units if a customer sticks with the plan for a certain number of years. Almost all policies give a maturity bonus. The idea is to incentivize a customer to stay through the policy term. On a comparison basis, if you stay in a Ulip for 10 years, the cost is 40% cheaper than a mutual fund. Now that there are no surrender charges after the fifth year, customers may be tempted to surrender their policies. So, offering guarantees will encourage them to stick through the policy term.
What is the persistency ratio of Ulips in your company?
Persistency is measured by what we call the premium-awaited policies. Persistency of a policy would mean that at the end of 13 months—one year plus a grace of one month—the policy receives its premium instalment. For our company, the persistency is 76%, which is not so good. We need to be in mid 80s.
T.R. Ramachandran is MD & CEO, Avivia Life Insurance Co. Ltd