A multi-fold effort is needed to avoid policy lapsation
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Product reforms by the insurance regulator has brought down costs associated with unit-linked plans (Ulips) to a great extent and traditional insurance-cum-investment plans to some extent. But the desired impact on persistency of life insurance policies is yet to be seen as insurers continue to report poor persistency. According to FY14 numbers published by Insurance Regulatory and Development Authority of India (Irdai), the life insurance industry, on the whole, could not retain even half of their customers at the end of five years of a policy. Sanket Kawatkar, principal and consulting actuary, Milliman India Pvt. Ltd, an actuarial services firm, talks about changes required in the regulatory system, and measures required to improve persistency.
What is your take on the way the insurance industry is regulated in India? Last couple of years saw a lot of reforms but some of the endemic problems such as mis-selling and poor persistency of life insurance policies still continue.
I feel that the insurance industry in India is too rule-based and very little principle-based. Obviously the root of it lies in the fact that Irdai has the dual role of regulation and development. In other markets, the regulators are entrusted with the job of regulation alone. There are many restrictions imposed now but we haven’t seen the desired results. For instance, product regulations were directed at reducing mis-selling, but that still continues and policies are still getting lapsed. In India the first year lapse rate is around 30-50% and renewal lapses are more than 10%. In other markets, for instance in Singapore and Hong Kong, the first year lapse rate is around 10% and there are hardly any lapses in renewals. It may be too early for the industry to move to principle-based regulations but we need to make a start. An example of this could be on seeing high lapsation, Irdai should instruct the insurer to bring down lapsation or forfeit writing more business for the next six months. If Irdai sets an example like this, other insurers would automatically fall in line. But what happened was Irdai came out with product regulations specifying the charges and caps on Ulips, and the industry moved towards traditional plans. The industry will always be ahead of the regulator and, therefore, it’s important that we focus on principle-based regulations and emphasize on proper disclosures.
The persistency of life insurance policies continues to be poor. Clearly, product reforms have not had the desired impact. What are we doing wrong?
I have always maintained that just because Irdai has placed constraints on Ulip charges, that doesn’t mean that the level of mis-selling would come down. Problem in the industry has been distribution related and it should have been tackled directly from the distribution side.
A multi-fold effort is required to enhance persistency. Customer education is needed as elements of mis-buying also contribute to lapse. Training of distributors needs to be enhanced and there should be realignment of distributor compensation. Oversight on distributor’s behaviour needs to be strengthened and regulatory fines on lapses on distribution need to be enhanced.
Insurers report profits despite poor persistency. Isn’t healthy persistency a key to profitability?
Statutory profits are a function of “actuals” against what was reserved for at the beginning of the year. The reserves are typically a regulatory requirement. Thus, the margins in the reserves create profits. With the shareholder net worth or excess capital in companies, if low or no new business volume is sold in a year, that may also show increased profits as there won’t be any “new business strain” eating into the profits arising from existing business.
Thus, one needs to look at the statutory profits carefully. Also, had persistency been better, perhaps the statutory profits could have been better than what the companies are currently showing. However, statutory profits are not the only parameter that one should be looking at. One should look at the other parameters such as new business margins, growth in embedded value, operating profits, growth in assets under management and persistency levels.
Insurers in India are struggling to make their distribution efficient so that they can control costs. Are other markets dealing with the same problem?
In other markets, the productivity of distribution channels is higher than that in India. What we have in India is more like a ‘part-time’ agency distribution model whereas in other countries, the distribution model is more professionalized with career agents. Inefficient distribution and high lapse rates have contributed to the fact that India has lower margins compared with others.
Traditional insurance-cum-investment plans are popular again. But these are opaque products with little or no disclosure to the customers. In comparison, are disclosures better in other markets that sell traditional products?
In the UK, there are significant levels of disclosures on participating business. It is arguable if customers understand all of these, but certainly regulatory oversight and company governance structures have improved as a result of such disclosures. The aim should be to develop disclosures that a knowledgeable customer is able to understand. Effort also needs to be made to ensure that the distributor is trained enough (and professional enough) to explain the features to customers.
Irdai has changed the draft guidelines on bancassurance to allow banks to choose between tied agency model and open architecture. The first draft had mandated open architecture. Do you see banks opening up to selling policies of more than one insurance company?
I doubt if banks would want to adopt open architecture in insurance distribution. Firstly, many of the large banks have their own life insurance companies, and therefore, may have long-term exclusive distribution agreements in place with the group life insurance joint ventures. Secondly, banks right now are dependent on life insurers for training and sales processes. In fact, in many banks, the insurance company’s representatives assist in the sales. By adopting open architecture, the insurance company’s support commitment to a given bank may come down—which the banks may not want.
The Insurance Laws (Amendment) Act, 2015 act allows for a hike in foreign direct investment. What does this mean for the customers? Will it mean products and services can be compared to international standards?
One would hope so. But many more things need to fall in place— improved persistency, cost efficiencies, flexibility to arrange distributor compensation, flexibility to structure products, flexibility on investments and so on. I think this would be a journey, and is not going to happen overnight.