BackIt’s a fallacy that bancassurance is much cheaper
Kshitij Jain of Exide Life talks about the impact of Irdai allowing corporate agents, including banks, to tie up with up to three insurance companies in the same line of business
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Insurance Regulatory and Development Authority of India (Irdai) has allowed corporate agents, including banks, to tie up with up to three insurance companies in the same line of business, allowing for open architecture. Kshitij Jain, managing director and chief executive officer, Exide Life Insurance Co. Ltd, talks about the impact of this decision. Exide Life, previously known as ING Vysya Life Insurance Co. Ltd, lost its main bancassurance channel last year when ING Vysya Bank merged with Kotak Mahindra Bank Ltd. The insurer relies on agents for distribution of its life insurance policies.
The new Irdai regulations allow banks to tie up with up to three insurers. But will banks want to open up? Will open architecture lead to mis-selling since banks will have to sell an array of products?
Banks have been given the open architecture option, but, in the short term, the top 5-6 banks that contribute up to 90% of the life bancassurance business may not adopt open architecture as they are promoting a single company. In the long-term, however, banks will have to open up to satisfy customers. This happened with mutual funds and it will happen with insurance too.
Open architecture will not lead to mis-selling because banks will be inclined to give the best value proposition. To be truly competitive, there needs to be freedom of choice for the market. However, banks should only sell simple products. One needs to leverage a bank’s customer relationship and technology, as opposed to advice, which the banks may not be equipped with.
Bancassurance is considered a more cost-effective distribution channel than an agency. Losing it would have put pressure on costs. Will you look for a new partner?
We have always believed in building our captive distribution channels and have accordingly been focused on agency (model). Bancassurance used to contribute about 20% of new business premiums for us; for some it is 70-80%.
Bancassurance is cost effective only when the bank is a group company; it’s a fallacy that bancassurance is much cheaper. It can, however, be cost effective in the long term on a marginal costing basis, and also if we account for the fact that persistency in the short term is superior in bancassurance
We would be looking for a bancassurance partner for three reasons. First, we were one of the first insurers that promoted bancassurance. In 14 years, we have built the expertise to effectively partner with a bank and serve its customers. Second, we have already built a pan-India presence with a comprehensive product portfolio. On securing tie-ups with banks, the additional new business will be on a marginal cost basis. Lastly, we have a strong presence and brand equity in the south and east, and also have experience in serving customers in semi-urban and rural areas. Banks will benefit by partnering with us, especially in these geographies, and effectively promote life insurance at a local community level.
The Sumit Bose committee has made several recommendations to make insurance products easier to understand, and thus reduce the scope for mis-selling. But the recommendations have serious ramifications for traditional plans.
We agree with the report’s findings about inadequate benefits disclosures. The disclosure levels have to be more detailed, simplified and must represent the accurate value proposition. However, the disclosures cannot be identical to other retail financial products, which are short-term in nature.
It’s also important to understand that worldwide life insurers have positioned their products as an avenue for long-term, disciplined savings and investments. These propositions are backed by guaranteed death benefits and reasonable returns, along with tax efficiency. No other retail financial product has similar bundled benefits, channelising and enforcing customers’ savings in a disciplined manner. While additional disclosures along with rationalized distributor incentives will help the customers, it is premature to debunk traditional plans.
But traditional policies are not easy to understand. Guaranteed products, for example, don’t disclose the net return, making comparison difficult.
Insurance is a 10-20-year product; there aren’t any comparable products. So, if you try to dumb down the comparison to IRR (internal rate of return) alone, it’s not fair, simply because this product is not being sold for the purpose of IRR. This is a long-term product meant for protection; cultivating a discipline for systematic savings; and building a nest egg. There’s a popular saying: insurance doesn’t make people rich but it makes sure nobody is left poor.
You launched another unit-linked insurance plan (Ulip) in August. Why? You mostly sell traditional plans.
This is a resurrection of sorts. We decided in 2008 to tone our exposure to Ulips. In the past 6-7 years, we have probably been the private insurer with the smallest exposure in Ulips; last year, we did 96% of our business in traditional (plans). There are two reasons for this. First, we have never been dependent on banks for distribution. Banks typically sell shorter-term, investment-oriented products. Second, between 2010 and 2013, many customers lost money in the market on account of Ulips. So, we chose to focus on traditional policies and that became the defining part. But in the past couple of years, regulations have made sure the proposition on Ulips is very attractive. Also, we found that over the past 3-5 years, we have been managing our fund’s performance well. So, with a good product and a good track record, we decided to re-enter the Ulip segment.
To ensure that Ulips are not offered to the wrong people, we have kept the minimum ticket size at 36,000. If ticket size is very low, you may sell to people who don’t understand the risk. If you want to be in the business for the long term, you need to make sure that mis-selling issues are minimised at the product design stage.
Now that the Insurance Laws Amendment Act, 2015 is in place that allows a hike in foreign direct investment to 49%, will you be looking at a foreign partner?
In 2013, when Exide fully acquired the company we had at that time itself formally informed the stock exchange that it’s our long term plan to induct a foreign partner. Having said that we know this is not something that happens quickly. You need to have many things in place. Given that the company is well capitalised and has brand recognition the immediate need is not there. We don’t need cash or a new name at the moment.
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