With several life insurance companies launching online products in quick succession, questions have naturally arisen on what this portends for the future of life insurance, especially its time-tested distribution models.
Internet penetration in India stands at about 10% and over the next decade this is slated to grow by several multiples aided by faster access technologies and the ever-decreasing cost of access. Increased online transactions is a natural corollary. With financial services playing an important part in fuelling the country’s economic growth engine, awareness and interest in the space has witnessed a steady rise. This has resulted in a niche which is as financially savvy as tech savvy, comfortable with both the product and the medium at the same time. These financially aware individuals, who are comfortable with the online mode, are willing to make definitive choices regarding their investments and expect to be rewarded for their efforts. The online model proffers such individuals the twin reward of cost saving and convenience.
Banks recognize this early on and the medium has helped them enhance efficiency and reduce transaction costs. Internet and mobile banking are becoming popular delivery channels, allowing customers to carry out a range of activities from debit authorization to fund transfer. These developments made banking easy, safe and affordable. Others eventually followed suit. The crucial aspect of safety online, which hitherto put many off the medium when it came to monetary transactions, has undergone significant improvement over the past few years with the development of robust and sturdy online transaction safety architectures.
Life insurance companies, however, did not fully take to the medium’s potential given the financial maturity required in understanding a life insurance product and offline processes involved in the purchase of such a product. But rise in the use of the medium in transacting more evolved and complex financial products, especially in general insurance, which shares near similar process and underwriting algorithm, have had them take a fresh look at the potency of the medium, resulting in the introduction of online products. First off the online shelves are largely pure risk products. Lessons have been drawn from international experience where term prices have dropped by 8-15% with the introduction of the online option. Life insurance, especially term plans, have been sold online in some of these markets since the mid-1990s.
In the short time since the first products hit the market, they have generated interest that has surpassed the sector’s expectations. From a customer perspective, online products are attractive since they are not only convenient, given the time and independence involved in their purchase, and transparent since comparison is easy, but also cheaper than their offline counterparts since the high cost of initial acquisition which characterizes the latter are absent here. The savings accrued by the insurance company in the acquisition process can easily be passed on to the customer resulting in cost savings. Further, for the insurer, the medium ensures greater geographical reach. Indeed, independent buying of financial products and services online is expected to increase exponentially over the next few years and the day is not far when a larger suite of life insurance products are made available online. The channel is roughly expected to contribute to at least 10% of the industry’s business in the next five years or so. In some of the advanced markets such as Australia, the figure is near 18%. But the question is how will the channel weigh on differentiation. Wisdom at hand gives precedence to greater product differentiation and price discrimination over outright price competition.
Nevertheless, the online channel is not an alternative to the offline distribution channel, but is complementary. Even as online buying increases over time, the offline channels of distribution currently in vogue will also grow. Newer distribution channels are needed to complement the existing ones to make the market grow. Addition of the online channel and other channels such as the post office will serve to expand the market and will significantly enhance the reach, appeal, sale and thereby penetration of insurance. This expansion is as crucial to insurance companies, seeking to grow their business in a competitive marketplace, as the country’s economic growth which is predicated on increased financial inclusion.
While the euphoria is well deserved and welcome, the channel is new and insurers must brace themselves for challenges. These could stretch from the mundane technical, affecting spot performance to the more complex, affecting pricing and revenues. Our own underwriting and risk management techniques, formulas and algorithms for the online channel will only evolve and become better over time.
Suresh Agarwal is executive vice-president and head of individual distribution and strategic initiatives, Kotak Life Insurance.