The big focus for Aegon in the past few years has been protection. As the new chief, do you share the same vision?
I buy into the strategy of protection and that will remain our mainstay. I don’t see that changing. If you look at the numbers of the last year-and-a-half where we have focused primarily on protection and direct sales, we have seen a good amount of resonance from customers, this means our growth, our direct-to-customer strategy and focus on protection are all getting a very positive response.
Last year, for example, our growth was 27%. This year we are growing at 50% plus and our NPS or net promoter score, which signifies how many customers are willing to promote us, has gone up from an average of 17% to more than 46%. In terms of new business, nearly 60% of our policies are term plans and contribute 30% to the premiums collected. There is so much scope for protection, but we will have to be cognizant of how markets will shift. But for now we want to focus on building expertise in the protection business.
Claims management becomes critical but a few years ago you had a poor claims settlement ratio of less than 80%....
The actual number is 97.11% of the claims. This year will be as good as last year, so we have improved a great deal and that will continue. Also, the claims settlement ratio you see published by the regulator is the aggregate settlement ratio coming from all kinds of policies. If you segregate the data between term and non-term claims, we will be way above everyone in settling term claims. I think over time, perhaps, one could further slice this data and publish.
But term plans are primarily targeted at the salaried class, as they are easy to underwrite financially. But when you look at the protection gap, it’s also about insuring the unorganised sector, which is majority of our workforce. How do you plan to include them?
If you are focussing on protection, naturally you will focus on the salaried class because it’s easier to financially underwrite them since their income documents are in place. But now we are seeing more self-employed demanding term plans. This demand is also coming from smaller cities. The need remains the same, so even professionals, like a doctor who is say the single earning member of the family, are in need of term plans. The main challenge, however, is proper documents because if customers don’t have income documents that are easy to read—like a Form 16 or an income-tax return—then how do you know their actual income? But we are trying different methods to figure out how we can insure these customers. The good news is that as the economy becomes more formalised and taxpayer base increases, it will become easier for us to underwrite.
Term plans have seen a lot of innovation, with many features and options packed in. What do you feel about that?
We are direct to customers and largely digital, so it’s important that we keep our products simple. The turn-around time for closing the sale and ease of understanding for the customer is very critical for us. Online customers are not looking at huge variations. The comparison is largely on premium and at best the customer will settle for critical illness cover along with a term plan. Complexity beyond this point on a digital platform may not be efficient. But yes, it may work when the distribution model is face-to-face. But for us complexity doesn’t work.
About surrender costs in traditional plans: even as the industry is aware that huge surrender costs cause reputational risk, the majority doesn’t want these costs to come down. Isn’t it against consumers’ interest?
We need to understand why we have high surrender costs in the first place: the main reason is distribution cost. We pay commissions upfront, so the cost is incurred upfront. So, if a customer surrenders early, a high surrender cost is levied to recover that cost. I think this is the root cause and this vicious cycle needs to be addressed and broken. So just reducing surrender charge will not really address this problem because it needs a more holistic solution in terms of regulations around the quantum of commission and reducing the gap between upfront and renewal commission. If we recognise that insurance is a long-term product and needs long-term servicing and commitment, then we will begin to question the higher upfront costs and will also focus on renewals; so this part needs to get addressed. Also, if investment guidelines are made flexible, we will be able to give competitive returns to the policyholders and this will also result, to some extent, in better surrender values.
Traditional plans return 3-5%. Have they outlived their utility?
I don’t think they have outlived their utility. Look at fixed deposits; they continue to be the go-to product for many people even though post-tax returns don’t give any real return. So, not everything can be seen from the prism of returns. These products serve a different need and that’s of assurance and security, and that need will remain.
Ulips have become a lot more attractive since they are exempt from long-term capital gains tax on equity; and structurally also they have come a long way, but there are still hygiene issues about them, as an investment product, like disclosure on portfolio. What is your view?
Many Ulips now are competitive and if you keep them for 7 years or more, they are actually better than mutual funds, cost wise. For a long-term goal, Ulips are suitable products and they are tax efficient as well. But tax is not your first reason to pick a product. If you have a long-term goal, then Ulips are attractive products and tax advantage is another point in their kitty.
In terms of disclosures, I think investors should always know where the money is going. Whether the investor is able to digest the data or use that data is a different issue, but as a manufacturer you need to ensure transparency and tell investors what you are doing with their money. And information should be given such that it’s easily understood. So, giving benchmark is good because internally we all benchmark our performance. A neutral and passive benchmark is always effective in terms of relative ranking.
As the industry looks forward to welcoming a new regulatory head, what’s your expectation from the new chairman?
There are a lot of important drafts like the reinsurance draft and the product committee report. If they start to pan out, they will be very constructive. Also, regulations should now move to outcome-based regulations rather than prescriptive regulations, so that we have greater flexibility. The regulator wants customer protection, which is important, but at the same time the industry needs to be healthy as well. And I think both these goals can be achieved if regulations move to outcome-based regulations. Also, as the industry matures, this is what we should be working towards.