With restricted freedom to price unit-linked insurance plans (Ulips) in view of the caps on charges and stricter norms for life insurance, leading to new business strains in life insurance, the key to managing profitability is controlling distribution costs. Ironically, companies with modest existing profitable books with a need to accelerate spending on distribution to gain brand value and customer recognition would need to tighten the purse more, making the exercise painful and difficult.
There are four components of distribution cost management, each one of them calling for a different set of strategies.
There will be an inevitable drop in commissions for all products, forcing companies to rethink the relevance of their marginal distributors. While the initiatives launched by several companies to prune their agency to an optimal size of highly productive feet on the street will gather momentum, the key is managing the motivation level of better performing agents. The level of engagement of companies with quality agents and those showing potential will need to be vastly different. Insurers in other markets go to considerable lengths to retain the loyalty of able agents, and in the Indian context this has to take several novel forms. Encouraging the entrepreneurial instincts of high performers to set up wealth management advisory entities with support from insurers could be an example.
Productivity and profitability of bancassurance
Companies spend huge amounts to generate business from bank partners and a cost-benefit study done by Towers Watson India shows that the bank channel is currently a high-cost medium, except for companies sponsored by banks. Most bank distributors are seen to operate as referral agencies, simply relying on the insurers to complete the sales process and service the customers following the limited leads provided by them. This is not sustainable even at a reduced commission level. Insurers may have to rework the priorities and engage with bank partners to own the process, and explore incentive-based solutions to scale up the output and quality of bank sales. An initiative to assist bank partners to make customer segmentation and transaction analysis with the help of technology to arrive at a promising set of insurance leads may be an example.
Tight leash on fixed costs;?making most costs?variable
While most insurers are beginning a rethink on their branch infrastructure, it is important to recognize that unlike in other insurance markets, there are tangible benefits in having branch presence in India such as instinctive association of branches by customers in terms of safety and service. Companies need to explore innovative ideas to better leverage their distribution partners having a wide branch network to lower their fixed costs. Cost-effective local branding initiatives and a robust hub-and-spoke model could be areas to explore.
Innovation in distribution through technology
There is considerable scope to boost online sales of insurance products with differentiated products and customer servicing approaches. There are instances of new entrants in other markets gaining a market share through disruptive strategies employing technology tools. Mass market telemarketing to customers of large distributors, such as bank partners, could be a viable initiative in India.
It is important to recognize a positive impact of the latest changes in insurance regulations, its potential to increase the appeal of Ulips to mass market customers as more cost effective and customer-friendly. The cost control impulses should not turn insurers into niche market firms catering to high-income segments and ignoring the vast potential emerging in the regions other than urban centres for Ulips. In fact, by combining traditional and unit-linked plans and gaining access to the growing household savings in non-metro regions, companies can hope to make true cost savings in the long run.
R. Krishnamurthy is managing director (products, distribution and markets, risk consulting), Towers Watson India.
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