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Mint’s Life Insurance Conclave in Mumbai, on 25 January, debated fixing product structure as an important regulatory option in consumer protection. 

Monika Halan, consulting editor, Mint was the moderator and the panelists were Sandeep Bakshi, managing director and chief executive officer, ICICI Prudential Life Insurance Co. Ltd; Trevor Bull, managing director and chief executive officer, Aviva Life Insurance Co. Ltd; Kshitij Jain, managing director and chief executive officer, Exide Life Insurance Co. Ltd; Sanket Kawatkar, principal and consulting actuary-life insurance India, Milliman India Pvt. Ltd; and R.M. Vishakha, managing director and chief executive officer, IndiaFirst Life Insurance Co. Ltd. 

Monika Halan: In terms of consumer protection, the global conversation among regulators has changed a little towards product structure in retail finance. The thought was that innovation is very important in the financial sector and control over the product structure takes that away. But regulators are coming around to the conclusion that they don’t want to tightly fix a product’s structure but set up some ground rules that take the monkey out of the product. Can we put all the costs in one box and label that? What does reforms in product structure mean in a product like life insurance? 

Sandeep Bakshi: Life insurance has two components: savings and investments, and protection. Over time, regulations have made the product fundamentally safe for customers.... Even non-par products give a long-dated guarantee, providing cushion against volatility of debt and equity. For par products, over a period, the regulator has taken a direction of making the product quite competitive. Protection as a category is independent. This again is like a risk product offering benefits to customers. At a fundamental level, the product has to be ‘mis-selling safe’. Once that happens, there is a claims part and a solvency part. Beyond that there are things like commissions, which have to be freed up. Regulations have given a broad guideline on commissions (on caps and not the base). Depending on configuration and channel mix, each company is adopting a different approach in term of high-fixed-cost and low variable, or low fixed cost and high variable.  

Trevor Bull: If it were easy to make this ‘magic box’, it would have been done in many countries. Globally, the biggest challenge that is faced—and it is worse in developing countries where financial literacy is lower—is that customers still don’t understand charges, whether we hide six different changes in different boxes, or put them in one. Many different regulators, including in India, have tried to find a way: show as a reduction of yield, better product disclosure…. But the reality is that the par, non-par and Ulips have different structures. What some customers want is potential for higher returns. Like in Ulips, but the customer doesn’t know it as Ulip. He just knows that this has potential for higher returns. Then some want the premium to be safe, but with returns higher than a fixed deposit. We call that par. Some others say, don’t lose my premiums, but I want some guarantee of an upside. We call that non-par. Then there is protection, the real business of insurance. In the end, we will have to strip the products to bare because a regulator wants to make sure that customers understand what they are getting and what is it costing them. Regulators have tried no-commission, fee-only, for example in the UK. So, now people won’t buy insurance because they won’t pay the fee. No one has found the real solution 

Kshitij Jain: Let’s take commissions out of the equation because everyone has strong views on that. And it’s not the largest (cost). For various reasons, your paper has taken it upon itself to make it the most obvious one. Let’s pretend we are discussing only online sales done directly and there isn’t any agent in the equation. One can do assisted selling for par, non-par and unit-linked business as well. The fact is that there is a well understood concept of reduction in yield in unit-linked (plans). In non-par you don’t need to unwrap costs because it is a simple concept: give this much money and take back so much money. So the entire conversation comes down to the scope of demystifying par. Among policies, par is still the largest selling. Now even if we demystify it, customers of these products will struggle to understand the concept. 

Halan: But people understand bank fixed deposits very clearly. 

Jain: I don’t see anyone discussing the margins that banks make. I find it peculiar that everyone is after tied-agent commissions, where the margin in life insurance is significantly lower than for a bank. So, in terms of spreads, there is a (financial) industry that is operating at a far larger spread than life insurance. 

Halan: Our view is that the agent is a very important part of the market, as he faces the customer and we need to design incentives so that he does the right thing. But we will come back to this later. 

R.M. Vishakha: I do think that we have the charges in a box for a Ulip. The objective is that the customer gets the benefit of the right product, and be able to compare. He can then add on his views on service, brand, convenience and others, for which he may decide whether to pay a price or not. I agree with the objective of having a benchmark that makes products comparable. Can that objective be achieved by putting the charges in a box? I don’t think so...we all believe that mutual funds have the same product structure. A layman still can’t compare two or three mutual funds. 

Halan: But there are third-party league tables. 

Vishakha: Those clearly come with a disclaimer that past performance does not indicate future performance. The aim of a product structure, or reforms or regulations is to help the customer. Let me take a simple example: group term. If company A, which has office workers and blue collar employees, compares itself with company B, which has only factory workers, it won’t work. But there should be comparatives in terms of how the returns are declared. Pick a group par and an individual par, and you will see that the rates for both are very different. So, there is a need for reform, in comparing benefits across products, but putting in that box of charges is not the way to go about it. 

Sanket Kawatkar: Not only in India, everywhere customers find it difficult to understand and compare insurance products. The regulator should talk about giving the principles of value to the consumer and leave the nitty-gritty to the industry to decide. That could mean putting a box, which includes the overall cost of management as well as distribution, and saying it cannot exceed x% of your premium. It is very difficult to measure what is good value for money. Even if there are products that offer the same IRR (internal rate of return) at maturity, it may be that one of the companies goes bust and can’t offer that guarantee when the product matures. Those qualitative factors have to be considered. So, the value proposition has to be appropriately described. One can’t form rules around that. The more the rules are made, more the industry find ways to work around them. In the UK, for example, it is the responsibility of the insurer to demonstrate that they have indeed treated the customer fairly. We should be moving in that direction. 

Bull: The biggest challenge for the insurance industry is that we keep being looked at as an investment. For instance, if it’s about a child’s education, the policy should not be stopped based on returns. Will the policy, if it was bought for a specific goal, serve its purpose? Insurance is assurance that a goal will be achieved. 

Vishakha: There is nothing wrong per se with our par and non-par products, but we have seen par products in the market that have not even given 1.5-2%. 

Kawatkar: There should be regulation but not over-regulation. Ulips, for example, are over-regulated. There are many factors other than IRR. 

Halan: Is it not right for the customer to know the returns in a manner they can be compared? 

Jain: One, people won’t be able to appreciate IRR even if it is put out. Two, competition of a life insurance endowment product is not with a bank fixed deposit or a mutual fund. The options for a middle class family are gold, some ponzi scheme or chit funds. These are the asset classes we compete with. (For) customer protection, don’t have one approach to all life insurance products. The requirements of different types of customers are also varied. A surrogate way to customer education can be based on premiums. People in our country need to have forced disciplined saving. We are the only industry looking long term, we offer guarantees and we are offering insurance. 

Bakshi: In the industry we often have discussions on exit loads and charges. Disclosures are the first step in reforming the industry. And the regulator has a hawkeye on us. In terms of overall cost, insurance is just about 25%; 75% is the cost of onboarding. So, insurers have to decongest the onboarding process. While we are different from other financial products, why shouldn’t onboarding a life insurance policy be as easy as opening a fixed deposit? 

There are some reforms that should be mentioned. One is IGMS (Integrated Grievance Management System: an online consumer complaints registration). Then there is dematerialisation of policies, which can significantly bring down the costs and improve transparency. Third is KYC (Know Your Customer). Our regulator was the first to look at eKYC and do away with wet signatures. These will bring down costs. Along with that is the constant vigil. This has become more relevant as interest rates have come down significantly. We have to recalibrate our cost structure, and we can have a transmission cost. We have to accept this. 

Vishakha: We have to understand that there is some amount of intangible part to life insurance. There is also a value proposition in the structure to compensate for the lack of financial awareness in a person. Comparisons with other products may be irrelevant for a layman, but as an industry, we should be able to compare and justify that the reduction was due to a, b, c…. 

Bull: Is the par structure transparent? No. Is the non-par structure transparent? Better than par. India’s financial markets are not mature enough yet and don’t have some products that others have. So, we don’t have the transparency to say that if you want this, it’s going to cost you X. 

Kawatkar: Talking about a point you raised earlier Monika, about long-term outlook of the industry not reflecting in reality, I agree that lapses are high...that’s due to faulty market conduct as opposed to the product structure being wrong. So, it’s about mis-selling or mis-buying, but not the product structure. 

Bakshi: The fundamental construct of the product has to be mis-selling safe. If we depend more on distributors, there will be more fretters, more calls to verify…. The more procedures we put in, the more inefficient the industry will become. Any product that becomes cumbersome in onboarding, becomes cost heavy.... We have to draw upon not our past but best practices of other financial services. 

Jain: Yes, level of disclosures should go up significantly, so that informed people should be able to guide people. But it’s far more complicated that just product regulation and commissions. As far as products are concerned, we must congratulate the regulator and the industry. We have made huge progress. The next step is that the company should not be in a position where it benefits disproportionately on account of a policyholder’s angst. 

Vishakha: In terms of market behaviour, we have to distinguish between Ulips and traditional products. Surrenders are primarily a Ulip problem. They are also high for high-value cases and not just low-value cases. Blaming these only on market conduct is a simplistic way of looking at it. 

Kawatkar: Yes, mis-selling can’t be the only reason. Mis-buying is also there. It is an issue with not being able to connect customer needs with the right distribution channel and the right product. Maybe we need templated products for customers who don’t have time and also and distributors who want to close fast. Maybe we need more flexibility in products for structuring the surrender penalties. 

Vishakha: Many customers know what they are doing...if you pay just one premium and that goes into a discontinued fund, you actually make tax-free returns equivalent to a fixed deposit? On Ulips, surrenders, and mis-selling, it’s not only the insurance companies to blame. Customers know what they are doing. 

Bull: Policymakers have to be careful with standardisation. Some (of it) is good because it makes things easier to understand but if you standardise everything, you come down to the lowest common denominator, which will be weak. And competition drives innovation. So, policymakers have to balance. The biggest influencer of product innovation is going to be smartphones. This will drive, not just online sales, but also ease of comparison and simplicity...but will still need a human being for more complex advice. 

Vishakha: We need to use technology to identify suitability and backend processes to prevent mis-selling. But it’s not about making the product a dummy. Some customization has to remain. 

Halan: Imagine we are in 2025 and India’s tax-to-GDP ratio is 26%. There are FRBM (Fiscal Responsibility and Budget Management) limits on deficit in place, where revenue deficit is zero and fiscal deficit is 3%. So, the need for financial repression is gone and government securities are now retail. What will happen to the insurance industry? 

Bakshi: Life insurance is one of the most comprehensive licenses in financial services. It starts with savings and investments and competes with other parts. Then there is annuity, morbidity and mortality. The mortality part is a unique proposition. We are seeing a subtle shift away from physical assets. In financial savings, with interest rates coming down, equity is becoming a relevant part of portfolios. While we compete among financial products, life insurance investment is with a long-term perspective. It is good to be evaluated, but some low beta stocks give value over a period of time. 

I want to draw from general insurance. About 15 years back, the total premium from health and auto insurance was together about Rs4,500-5,000 crore. The premium figures now are Rs70,000 crore, when only third-party insurance is mandatory. So, Indians have been voluntarily buying insurance. In Rs30,000, we can get (term) insurance of Rs2 crore. 

Jain: 2025 is not too far away. If government is not in a situation in which it needs cheap funding, which the life insurance industry has been providing, it could unleash the industry. Today, investment guidelines are very restricted. The future could be alternate asset classes. We could end up funding, for example, the entire real estate and infrastructure boom. 

Vishakha: You have described an economy but will there be equitable distribution of that wealth? If we still have segments of HNIs (high net worth individuals), mass market and micro, then insurance will become the financial planning tool for a majority of people. 

Kawatkar: In 2025, I see life insurance industry increasing its protection element. I expect the government to open up provident funds to alternative investments. I expect life insurers to be allowed to offer third-party funds. I expect many more exotic classes to emerge, which life insurance can use to offer more structured products. This doesn’t exist in India at present. And I expect the government to aid in long-term retirement savings and pensions, which we lack.

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