When the life insurance market was liberalized following the acceptance of the Malhotra committee report by the government of India, the financial sector was expected to get a much-awaited boost. The government’s efforts during the 1990s to free the economy of licence raj and creating suitable climate for foreign direct investment (FDI) proved encouraging. Riding on this wave, prospective companies started figuring out business volume and growth in view of the demographic advantage India had. A large number of young population was entering the customer segment, larger than the population of many developed markets.
By the end of 10 years post liberalization, 23 life insurance firms were operating in India and many more were waiting in the queue. Up to September 2010, almost all firms achieved high growth. As a result, the market expanded and stiff competition resulted into a lot of innovative products and marketing strategies. In spite of the economic meltdown that started in 2008, the Indian life insurance industry continued to grow. But today the industry finds itself off the track. The easiest diagnosis of this crisis is the unprecedented “regulatory chauvinism”. However, let us try to locate the reason somewhere else, too. Can the industry have the courage to analyse its own doings?
It would be worth a management institute’s case study to find why and how some of the companies backed by global insurance giants have incurred huge losses. It would be worthwhile to know why many companies haven’t been able to reach breakeven in spite of being in business for about 10 years.
Illustration by Shyamal Banerjee/Mint
One needs to handle life insurance business with one truth in mind: it is a very long-term business for the promoters to earn profit and a very long-term product for delivering value for money to the customers.
For the first 8-10 years, the common motivation to drive business was to outsmart competitors by achieving high revenue growth. This also created an illusion of eating into the market share of the erstwhile monopoly insurer. The new companies took a number of years to realize that learning from their competitor would have been wiser than just competing. It appears that in the first five to six years, the incumbent executives found the sector very fertile to satisfy individual ambitions and most of them bypassed an important role that they needed to play: to understand the nature and purpose of the business of life insurance and to make all stakeholders understand it. The chief executive officer (CEO) must have a total view of the business.
The unit-linked insurance plan (Ulip) was not an innovative product, nor was it a product the Indian market was waiting for. It was fuelled by the healthy stock market conditions for ultra short-term gains for companies to support their flamboyant business strategies at the cost of customers. The rampage went on unabated till the Securities and Exchange Board of India and Insurance Regulatory and Development Authority spat on the investment aspect of life insurance products made everybody realize that life insurance in India was no longer what it ought to be.
It is hard to understand how the foreign partners, who were core insurers, remained silent when the drama unfolded. The companies were expected to look at the issues of product design, consumer’s needs, distribution process, cost efficiency and conservation of business, among other things, for suitable value creation for policyholders as well as for the promoters. The boards of such companies, too, allowed too much time to the management team to realize what is good for business. The CEOs could have been more forthright in acknowledging what had gone wrong. Everybody missed the point that what was good for emerging sectors such as fast-moving consumer goods, telecom or retail may not be good for life insurance.
The industry needed courage on the part of CEOs, who could acknowledge flaws in strategies and could then take bold steps to strengthen the core values of the business. If that happened, millions of advisers would not have gone out of their profession and several young men and women would not have lost their jobs, several crores of money would not have been simply wasted on creating infrastructure not in use now.
This is where lack of accountability in our management system is noticed and we may be inclined to believe that this has been the singlemost important phenomenon that explains the present condition of the industry, characterized by the unprecedented regulatory interventions and negative growth in business. In fact, the due concern for creating a culture of accountability was lost in the euphoria for harnessing a vast untapped market.
To conclude, it may be suggested that the board of a company, while defining the universe of stakeholders, should also include the industry that supports their business. Then alone the companies would be able to determine their own success path.
Kamalji Sahay was managing director and CEO, Star Union Dai-ichi Life Insurance Co. Ltd.
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