Sandeep Bakhshi, who was due for retirement, has got an extension for 2 years. Bakhshi has headed the company for nearly 8 years now. Under him, in 2016, it became the first life insurance company to go public. In conversation with Deepti Bhaskaran, Bakhshi talked about his unfinished business and how the product committee is set to bring in the next wave of reforms in cleaning up insurance products. Edited excerpts:
You have an extension of 2 years. What’s the unfinished business that you would be focussing on?
Simplifying on-boarding is my dream. Life insurance products, which also offer investments, should be as easy as it is to buy a fixed deposit from a bank; and pure life insurance products should be as easy as buying a motor insurance policy. We have to make on-boarding smooth, and with databases like Aadhaar and Cibil that are excellent surrogates, the whole process of underwriting can be quick. I am confident that I will realise this dream before my term ends. I feel that in the protection category we have barely scratched the surface. It’s a myth that people don’t buy life insurance if the product doesn’t offer returns. Term plans as a category have become hugely popular in the past couple of years and we want to go beyond just the salaried. Documentation is a big roadblock currently because for financial underwriting we need income proof; but with demonetisation, financialisation of assets and the implementation of Goods and Service Tax (GST), it has become so much simpler. Protection and investment are societal needs and protection comes first in the pecking order. We, as an industry, haven’t done much there and I hope that changes.
In term of savings products also, I feel we should do more. Insurance is a long-term product, so we are not in the short-term market where fixed deposits and mutual funds operate, but these same products operate in the long-term market also. Mutual funds have popularised systematic investment plans (SIPs) whereas the Life Insurance Corporation of India (LIC) has captured single premiums. Private sector has ignored both. So from FY2015 to September 2017, mutual funds grew from around Rs10 trillion to about Rs22 trillion, LIC grew from about Rs17 trillion to around Rs22 trillion, whereas the private sector grew from around Rs4.8 trillion to just about Rs6.3 trillion. Clearly we missed out on the opportunity. I feel product simplification and freeing up distribution will help us grow.
One of the things that can make insurance misselling proof is to offer customers easy exit options. However, while traditional products charge the entire premium as penalty if you exit in initial years, the surrender costs are very low in unit-linked insurance plans (Ulips). Why this different treatment?
There is a notion that traditional investment products are protection products whereas Ulips are investment plans—but this is wrong. It’s important to understand that products such as term plans are protection plans whereas the traditional money-back, endowment, guaranteed plans and even Ulips are investment products. All these investment plans offer a minimum of 10 times the annual premium as insurance cover, they invest in debt and equity and offer the choice between single and regular premium options. There’s no difference between the two products except when it comes to surrender costs and there is no reason why traditional plans can’t adopt the exit charge structure of a Ulip.
The product committee report recognises high surrender costs to be a problem but also states that most in the industry want status quo. What do you think?
At the end of the day, construct of insurance products has to be from a customer’s lens. It has to offer value and fairness to customers. Our inability can’t be the base for not offering something that’s fair. If the need is protection or if the issue is a possible loss to a customer if the policy doesn’t complete the premium payment term, we need to look at products that address these needs and issues.
But why is the industry still so hesitant? What sort of regulatory changes need to happen?
Insurance industry comprises life insurance and general insurance. Most of the complaints in general insurance are around claims settlement. And many times it’s the fine print in exclusions that result in rejection. So when the system looks at what the main issue is, then over a period regulations begin to address it. In life insurance if you see a large part of complaints are around not understanding the products, and if you see how regulation panned out, it addressed these issues in Ulips. This is bound to happen with traditional plans also. The fact that committee reports show an arbitrage in surrender costs between Ulips and traditional plans, it is recognition that there is a problem and I am sure regulations will address it.
But you should understand that traditional savings plans have been the bedrock of the industry and making fundamental changes to them will not be easy. Plus, this comes at a time when the industry is finally seeing growth and improving some important parameters such as persistency. So, should we disrupt this momentum or give the industry more time to demonstrate its ability? I think there is no doubt about reforms but it’s the pace that needs to be thought through.
Interests of industry and the customers are aligned. Protection products offer maximum profit margins and persistency is key for long-term health of a company. The same things are good for customers as well. But historically, this is not how insurance was sold. Is it because the industry is hostage to distribution, which focuses more on commissions? Is there a need to re-look commissions as well?
Insurance will always depend on distribution and I think most other financial products depend on it, so that’s not going to change. But... historically there was a huge disconnect between the insurer and the customer. It was agents who owned the customers and insurers interacted with agents. But that’s changed dramatically as insurers are beginning to own their customers. Today the concept of orphan policies doesn’t exist because even when an agent leaves the company, the direct team of the company takes over. Historically the customer was one step removed from the insurance company but now that’s not the case. I think it’s the ability of insurers to reach out to customers directly that has transformed the whole architecture.
Talking about commissions, I think we are getting bogged down too much by commissions. In my opinion controlling commissions is not the solution but making insurance misselling proof is. One needs to make sure that there aren’t any issues in the product that the customer can be confronted with. After that, how much I pay to the distributor should be my decision. This, of course, will be within the overall cap of expenses of management that’s already defined.
Thus, it’s the product that needs to evolve and I feel commissions should be freed up because each distribution architecture has different cost pressures and we need to compensate it accordingly. We also need to focus on flexibility of distributors. A distributor should be able to sell a gamut of life, health, motor insurance, mutual funds and loans. This is how the distributor is going to own the customer. The solution is to remove the complexity from products and free up the distribution.