The topic of the second panel discussion at Mint’s insurance conclave was: Life insurance 20-20: Issues for the next 20 years. On the panel were: B.Venugopal, managing director (MD), Life Insurance Corp. of India (LIC); N.S. Kannan, MD and chief executive officer (CEO), ICICI Prudential Life Insurance Co. Ltd; Prashant Tripathy, MD and CEO, Max Life Insurance Co. Ltd; R.M. Vishakha, MD and CEO, IndiaFirst Life Insurance Co. Ltd; and Vibha Padalkar, MD and CEO, HDFC Life Insurance Co. Ltd. The discussion was moderated by Monika Halan, consulting editor, Mint. Here are the edited excerpts:
Monika Halan: Life insurance has come a long way in the last 20 years. However, for me, some basic issues still remain. When I look at the industry from the point of view of a consumer, disclosures, persistency, and misselling have been large issues for the industry. The 2010 reform for Ulips, had it also been extended to traditional policies in some way, the industry today possibly may have been very different. I am going to start with Venugopal. LIC has meant insurance for a whole generation of Indians but the structure of the products that LIC has produced and sold has been—very little insurance cover with more of an investment. It is more like an FD with a crust of insurance. LIC went through its own experimentation of Ulip products over the 2009-2010 period and then it reverted back to traditional. So there has been sort of a rethink within LIC on the product portfolio. So if you could just take us through how LIC has looked back in the 20 years of the product mix.
B. Venugopal: In my view, it is not correct to say that we have focused only on investment-based products because ultimately we believe that somebody who buys insurance has a purpose of risk cover that is paramount for any product. But it has been the case in our country; of course, the experience in other countries would be different. The focus has been on products which sometimes offer returns also because we had still not come to a stage where one was ready to buy a pure term insurance plan. That was the culture for a very long time before the industry opened up. After that, there has been some shift because the first unit linked product came in the year 2000 or 2001. In the initial enthusiasm, we also sold at a large number. But as you mentioned, perhaps not all of them were sold the right way. So many people burned their fingers but people also made money. But our realisation is that, as a life insurer, our primary responsibility is to ensure coverage. Today things have changed substantially. Look at the product mix that LIC has; out of total Rs25 lakh crore of life fund that we have, hardly Rs43,000 crore is of unit linked. But for everyone else, the ratio is 51-49. I think out of Rs6.60 lakh crore fund sizes for all the companies put together, Rs3.34 lakh crore is unit linked. Now whether this product mix is right or wrong, it is ultimately for the customers to decide. But as an institution, we would like to develop a product mix that is ultimately the choice of the customer. It is not that we have abandoned unit-linked products. Right now we have only one unit linked product; there is another one in the offing. This year, we have consciously decided to focus a little more on some of those areas where perhaps we have not spent as much time.
Halan: Kannan, I want to come to you and ask what ICICI Pru has gone through. The DNA has changed several times at how the company has looked at insurance. Any insights on where you are today; you are listed, so what is it that you have learnt as a firm?
Kannan: If you are talking about the whole journey of the 18-year period, one of the things that we have been clear about right from the beginning is that we have to be a multi-channel multi-product company and that basic ethos has been there in the company for a long time. To talk about some of the new channels which emerged when we started the business—back then it was only an agency-dominated business. We started off with bancassurance and we were one of the first companies to start that. At that time, it was more of a referral model; banks becoming a corporate agency as a model did not exist at that time. So we started out with bancassurance. Then later, we hired corporate agents, brokers and now we have online web aggregators as well as direct business. So the ethos has been to reach the customers. We have to have our own channels and also go through all the other channels who in turn have a longer and deeper relationship with customers. I think that ethos has been pretty much there from the beginning and that's the reason why if we look at our channel mix today, it is about 50-55% bancassurance, then about 20-22% agency and then the remaining in rest of the channels including web aggregators including corporate agents and brokers. So I think in a country like India with a pan-Indian opportunity which is there, there is a need to further expand in terms of policies, a multi channel architecture would be required. In terms of products, we were one of the first ones to introduce Ulips. We look at Ulip as a product which is extremely transparent from the perspective of charges being known very clearly to the customer. Then we have this benefit illustration where we show how the fund is going to move depending on the market movement, and the charges have been very transparently laid out. And of course, once the customer buys it, he is also subject to the daily vagaries of the NAV depending on the market condition. So there are a set of customers out there who understand that the investment is subject to market to market vagaries and everything has been laid out. That's the customer who buys that product. Then as you said, 2010 regulatory changes happened, where essentially the product become a long-term product and minimum lock-in was stipulated and I thought that the regulator did a smart thing by saying that let us go through the investment-led protection but let us layover a minimum protection of ten times so that insurance can be achieved through the route of investment itself and I think that it was a smart move that has led to the Rs127 crore of sum assured that we talk of today. That is something that we started off with. So our philosophy on the product is also a multi-product company. There are certain set of customers, certain set of distributors who would be comfortable in selling Ulip and there are other set of customers for whom the traditional products give their own value proposition. But the key across all the products is persistency. When a customer stays for a longer time he gets the benefit, whether it is in a traditional product or Ulip.
Halan: Vishakha, you have moved from a general insurance person to life insurance. As you entered this very different industry, what are the two-three things that you were surprised by—both positively and negatively?
R.M. Vishakha: It is going to sound very surprising but I didn't know what endowment was. I joined in 2001from a non-life sector and honestly at that point of time, it wasn't that we had a lot of money; none of us were really investing in mutual funds. Mutual funds were new. I remember I had one SBI mutual fund and I said what do I do to redeem it and they said the value isn't much for it right now; just leave it as it is for now. And I actually redeemed it 20 years later. I didn't know what NAV calculation was. For me, the entire concept itself of how endowment products work, how NAVs work, how Ulips work was new. You have to remember that in 2001, Ulips were just a traditional policy unwrapped. You had high charges. I accepted everything as it was because I didn't have any background. You know when you are a sales person, you take the product, you see the positioning, and you say okay this is where it will work, these are the people I can pitch to and you go and pitch a product. So that's really how you look at it. But when you start looking at it from a CEO-perspective, then you realise, when we started India First in 2009, the Ulips products had been stripped off of all its charges. Traditional products didn't have any lapse profits that the companies could take. So I think the more I saw it from that perspective, I started realising the immense amount of difference that the regulations have made. However, the public perception has not caught on with the kind of regulatory changes that have been made.
Halan: Prashant, how does your foreign partner, the Japanese, look at the Indian market and the regulations, the state of the industry, and the way business is done? What are the insights that they bring into the board room or in the way the company is run? Also, do they have a view on the stage of the Indian market; do other countries typically go through the process that we have gone through in terms of product structure and product mix?
Prashant Tripathy: The good part was that the foreign partners came in 2012. Ever since, though the pace of regulatory changes has remained pretty strong and there has been a series of regulatory changes that have come, being from much matured markets, I think I haven't heard them talk about the kind of product mix that we maintain within our company to be extremely out of sync. Those products are common even in Japan. The focus on protection and pure term is much higher in Japan, which is the direction that the industry is moving in. Secondly, with their experience, it's an evolution that we all are going through. The pace of change in India is definitely higher than how it's been for many other countries. It's because of the buzzing population, how the regulatory framework has evolved. I think, overall focus with respect to changes in India will continue to be higher. What gives lot of comfort to our partner, especially the shareholders, is how the industry and our company have evolved in last 5-6 years versus how it was from 2001-2010. Coming from outside, the first few years were bizarre. The persistency numbers and the distributor compensation, especially with respect to Ulip, were pretty high and that's what was being sold. People were creating lapse-supported products; so all that is gone now. If you really take a step back and think about the health measures, they have significantly improved for everybody. So that gives a lot of comfort to our shareholders.
Halan: Venugopal, I want to start again with LIC because LIC defines that traditional approach to insurance for us. LIC talks about extremely good claims ratio and it is very impressive, but then I look at the persistency numbers and a 61st month persistency number is still less than 50%. When you look at the product structure, other than the term products, it is really more of an investment—a fixed deposit product with a crust of insurance. When we look at claims, then it is not really the risk that is getting covered, it is really the investment made by the individual which comes back with some interest. A lot of this conversation comes out into the open with technology; especially with the younger people who are very focussed on what they get out of a product. Concepts like IRR, XIRR, which maybe the older generation did not understand now will be on an app. How do you look at the future in the context of all that I have described—of the demand bulge shifting to a very different part of the population, technology coming in, court-based intervention and the macro changing itself; how do you see LIC then?
Venugopal: The first 20 years has been a journey of discovery and growing up for everyone. Till 20 years back, we were the only ones; whatever we did was okay and acceptable. Now many things have changed, many distribution channels have come in, and the way business is done has changed. As you said, the expectations from customers, especially the younger ones have all changed. But first to speak for LIC itself, what is it that we should do in the next 20 years? I think the biggest answer to that has come from what the chairman said. He spoke about the coverage gap, which in life is about 90%. That is still in terms of premium. But the more striking fact is that in last year's annual report of Irdai, it says that only about 22% of the Indian population are covered. For us, as in institution, that was created to spread the message of life insurance to every nook and corner of the country, that is the biggest challenge. We exist because people need insurance. So for the entire industry, for the next 20 years, the focus has to be on bridging this gap. Unfortunately, we allowed ourselves to be measured in terms of yardsticks which are not relevant to our country because we talk about penetration, we talk about density and both are based on premium. It is very easy for both of them to grow with no new person buying but if they buy more, both of them will grow. So real measure should be how many persons are insured. So for us, that is very clear. We will focus on getting more and more people across the country getting the cover. What else we will do is that in every stage of growth, you need to look at how you will attract the customer and you need to design products which are more relevant. Last year itself, we have started the journey where right at the top, the focus are the millennials—what is their behaviour, what kind of products they would like. When I joined the industry 30-35 years back, most people's worry was that they might die very young. It has now significantly shifted to the worry of living long. Everyone has given up including the government offering anybody defined benefit pension. So that is another shift that is happening and that will grow in my opinion. We will focus more on pension. Then health insurance, which is a very lowly used life insurance product of health; so my view is that these three will remain in focus. First to increase the coverage, second is to focus on products which are taking care of needs other than your pure life cover.
Halan: See, there is no surprise when an FD in my bank comes back; then why this celebration when a traditional plan which is essentially a fixed deposit with an insurance cover; why is there a celebration that look, my claims are so good. If the claims on pure term are 99%, then I will celebrate. So that has been my surprise that one, your persistency in 61st month and we don't know what the tenth year persistency is because Irdai does not disclose those numbers. And these are typically 15-20 year products. So we don't know what those persistency numbers are plus this is really FD money coming back. So that has been my disconnect.
Venugopal: The way I look at it is like this. Say 1,000 people buy insurance and only 4 die, you will be happy. If less than four die, everybody is happy. Now the fact is that when you buy a life insurance policy, there is an element of uncertainty. We hope that nobody dies. They live happily ever after. So the focus on term claim or death claim coming with a same level as other claim, that is very well taken. That is our attempt but there the issue is that these claims are predictable; so they get settled a little quicker. But you can compare our death claim settlement ratio and you will still find that they are extremely good. Persistency is an issue and I accept it; not just for us but for almost everyone it is an issue.
Halan: I want Kannan and Vishkha to debate on whether the next 20 years belong to Ulip or traditional investment plans.
Kannan: To answer your question, it is going to be neither. The future is going to be from a growth perspective, the protection and annuity. I think these are the two big segments we believe are going to be big opportunities. This is because, whether it is macro or consumer behaviour, there is going to be a sea change. So this will mean that for companies like us, in the industry, there is going to be a huge volume opportunity as well as a value opportunity. I say value opportunity because if you look at the working age, let's say 20-plus to be about 65 years; from about 800 million people today, it's going to be more than a billion people in the next 20 years. There are huge numbers of people working, saving and moving on. Then from 65-plus segment, which are going out of retirement, so that is going to go up and double at least. So there is a huge annuity opportunity out there. During this period, India's per capita income would have moved to about $2,000 from today to $10,000 in the next 20 years. So, look at the need for protection; whether it is a liability protection or income protection or the kind of aspirations and the needs we'll have for needs-based savings. We are a unique industry that can give protection to the family on a financial goal, whether the breadwinner exists or not. I think no other license in the financial sector services can give the power to achieve the family's goal even without the breadwinner not being there. That is a powerful license which has been given. So for a term insurance, instead of lump sum, there can be money for goal-based saving whether it is education or marriage, etc. Mark my words, it is going to be a decade of protection going forward.
R. M. Vishakha: I think completely differently. I think Kannan is right in side-stepping the whole thing on Ulip and traditional because we are talking 20 years. If we were talking five years, perhaps that debate would have been relevant. When you are talking 20 years; the way I want the industry to evolve and the way I visualize it is that money is very personal. All of this has served a purpose and the purpose has not just been protection as people call it but it is actually about risk management. Risks in terms of an individual are not just about how you invest but it is your ability to invest. The way I see it is, having that money when you need it and you have this entire ecosystem that works together—whether it is using blockhain technology or any other thing. But what is goal-based protection? Suppose your child is in school, will that continue? So if you are around, will the school start charging a certain excess amount to continue to fund the fees of the child for the next 10 years and, therefore, is the saving actually linked into the school fees? So are you actually saving right through that? Are you actually then using a grocery store and the grocery store has an insurance and makes sure that if you are not alive, then that much of grocery keeps coming to your house irrespective of whether you save or don’t save...
Halan: ...If a grocery store shuts down or school shuts down, then?
Vishakha: ...That’s what I am talking about. I am not getting into how the whole “solution-ing" will happen, because there are obviously a lot of things; whether they will transfer or it will be a blockchain technology or if it will be wholly integrated. I will give you an analogy of how it has already started happening in health. It is not only the doctor who is not treating you. You have got a yoga teacher who is treating you, you have got your office telling you to walk up the stairs; everybody is starting to look at your health and it is not just you. It has shifted to the entire environment.
Halan: Vibha, you have strong views on how the regulator should allow life companies to allow health products. So looking at the next 20 years, why would a life company offer a general insurance product or why do you have standalone health companies and general insurance companies also offering the same. So are you thinking of collapsing the entire part of the industry?
Vibha Padalkar: So just dialling back, life companies used to be allowed to sell health indemnity products. There was some level of cover as we understand from the regulator that was given to standalone health companies. I have two points on this topic and why I feel extremely strong about this that life insurance companies should now, having given the cover for more than five years, be again allowed to sell health indemnity products apart from health benefit products. One is that the needle has moved very little and the requirement is enormous in India. An individual typically would have four or five health incidents in his or her immediate family situation. Also, the sheer numbers also show that even today 75-76% is paid out of pocket as against worldwide, which is about 18%. So really what are we quibbling about? There is enough and the customer out there is woefully under-penetrated. So we can just say that there is confusion in the minds of the consumer. But is that really the case? Let the consumer deal with it with whatever disclosures that is required. Also, I feel that from a life perspective, health is just a part of that journey; artificially saying that one part of the journey I can't cover, but the other part I will cover. So ramping up of health and ramping down of mortality as a person who heads towards retirement is something that might make a lot of sense. So you keep a level premium and ‘n’ number of such offerings wherein it becomes seamless; where does mortality stop and morbidity start and vice versa. And these are all different aspects of protection. It becomes really restrictive. I am not saying that X part of what Irdai governs should not sell health insurance; I am just saying that we haven't moved the needle at all.
Kannan: Just to add to that, if you look at the overall distribution and reach of the whole life industry, we talk about 2 million agents and the whole bank branches and everything; I think it is going to be a great addition for increasing the health penetration in the country if we are also allowed to do similar type of things.
Halan: But why just stop at health; why not household or car, etc?
Kannan: I agree but as Vibha was saying, I want to supplement to ensure that mortality and morbidity go together....
Padalkar: ...And also, when you go for medical tests, it's a very minor effort from both sides—the company and the customer...
Kannan: ...And for the critical illness type of a product that each of us offer, anyway we have to have that expertise and the real expertise in writing that business. I think that the need of the country is so huge that these artificial boundaries over a period of time should be eliminated.
Halan: Prashant, how would you look at this? What do you see in the next 20 years; in terms of the product mix and catering to the new generation?
Tripathy: I will perhaps apply a few frames and let me begin with the frame—distribution. I think the distribution is going to undergo change. This model that we followed with respect to bank and agency, while they will continue to remain dominant for a while; I think agency will have to change. And that change may not happen by the 180 degree shift from a human to complete computer or digital interface but quasi human-digital interface will be the future. It will have to move in that direction because as all these X, Y, Zs come into being, they will not be very comfortable dealing with a human being that is not transparent, who is not sharing, and who doesn't have the expertise to connect, and so on. So that one part of change will happen. Insurance agents may not fully go away but the agents will become more sophisticated who is ready to share the information which is required and is able to connect with customers who will appear after 20 years.
On products, I think, life insurance license is one of the most potent licenses. It is not simply about giving somebody the claim when he or she dies. It is in the business of managing risk through life events. You could debate saying that the value proposition that the life insurance company comes up with in normal saving product design is not good enough. But it will have to be increasingly good enough for it to continue to exist and I am sure that as companies continue to grow, the scale, the benefit, etc will come into being. I will say that life insurance will continue to manage these risks but life insurance will not compete on giving the best return to the customers; that is not our business. Several product designs might but life insurance as a whole will remain in the business of managing risk and not giving the best returns.
Halan: I hear the point that life insurance is not about giving a great return. There is a cost to guarantee and increasingly as the younger population comes into being the main market, you cannot not tell them what they are going to get. You cannot say that your returns are going to be a 120% of the sum assured; they will figure this out. The older generation could not figure it out but they will figure out that the IRR is 3%. So let the choice be with me as a customer to say, you know, what is the guarantee that I will get 5%? When we have an inflation targeting central bank, which is going to keep the inflation somewhere around 4%, if I am getting a guaranteed 5%, it is a very compelling argument. But tell me that it is 5%. So why will you not tell me what I am going to get, and why will you peg it to a third or fourth number? Vibha, I want to check with you that why would you disclose the returns of an annuity product without taking time value of money in mind, saying that it is a 12% return but the minute you take in time value of money, that return drops to 6%. So somewhere you will not be able to treat the policyholder the way they have been treated. So how does this go forward?
Padalkar: If someone is looking for a short-term investment horizon, then this is not the product...
Halan: But even long-term persistency is 44%; so where is your long term?
Padalkar: ...And it is both ways and it is slightly more complex. If you look at the structural aspects of Ulip, for example, which continues to be my pet peeve, you have almost removed every share of exit barrier and to hold the customer. Why is it that we are comfortable with the lock-in in PPF (Public Provident Fund), but not with Ulips.
Halan: Could it be the way it is sold? Sell a product as a five-year product and then you wonder why at the end of five years people have withdrawn...
Padalkar: Even after five years, it's one thing but why are they withdrawing after the first year, especially in a unit-linked construct where you get a 4.5% guarantee. Insurance companies largely have to invest it in G-secs. So you get, say a 7% return and it's treated as tax-free; though incorrectly but treated as tax-free. And there is no credit risk. You'll find very few products to beat that kind of an IRR; more so, if it is a financial large ticket investor. So, some of these things are structural to your point on persistency.