Pay-as-you-drive policies show a maturing insurance market

India’s financial regulators have for long been criticized for their conservative approach – be it the approval of new products or processes. But they appear to be progressively shedding that tag. And that is reflected in the latest move by the insurance regulator – Irdai to allow insurance companies to offer sophisticated technology-based and add-on policies or cover. Consumers will now have the choice of policies such as pay-as-you-drive – which will be based on the kilometres covered annually and presumably declared upfront and tracked through technology, and pay-how-you-drive – again based on technology to monitor driving and violations besides the floater policy to provide coverage to an individual with multiple vehicles including two and four-wheelers. Much of these are aimed at India’s millennials who are comfortable with digital products and payments. It offers more options for policyholders while opening up the local insurance market to technology-driven covers. What’s encouraging is not just the introduction of these concepts but also the insurance regulator’s decision last month to allow insurance companies to launch products without its prior approval. It may also have to do with the maturing of the industry, which was opened to private firms two decades ago and rapid digitization.

The launch of these new products will hardly move the needle on general insurance penetration in India with the share of life insurance way higher at over 75%. The claims ratio for the motor segment may have come down at 75.6% in FY21 compared to the year earlier but the underwriting losses of the industry were still high at a little over ₹20,000 crore in the same fiscal year. It would also be too optimistic to expect significant changes in driver or driving behaviour even with technology-based tracking apps in an environment where rules-based behaviour isn’t the norm. And with limited incentives to alter this. But that should not deter the regulator or insurers.

In the 90’s, the transformation of banks and the competition which was fostered had much to do with the entry of private banks and the introduction of technology. Over time and in the next phase, the challenge to banks came first from mobile banking players and later payment banks and fintech firms riding on technology. That has helped expand credit, reach out to new customers and lower transaction costs.

The RBI too moved this year to promote a new company with an independent board to encourage financial innovation. The RBI Innovation Hub aims to create an ecosystem that focuses on promoting access to financial services and products for the low-income population in the country and bringing world-class innovation to India’s financial sector as it says.

While doing all these, both the Irdai and the RBI have to be much more mindful of consumer protection. The insurance regulator has provided much more freedom to insurers but will insurers invest in time and effort to ensure that the new sophisticated products customers are fully understood by them. Insurers have far more responsibility in this regard and to ensure that the digitally-enabled insurance segment takes off.

The principle of caveat emptor does apply but a prudent regulator also needs to ensure, especially in an under-penetrated market like India adequate protection and redressal mechanisms. That would require a far more effective ombudsman at work for this sector too. In banking, an integrated Ombudsman Scheme to resolve complaints of customers across the sector is now in place.

All these challenges hardly look formidable in a country where the transport minister says he is now considering a law to curb the practice of vehicles parked wrongly on the streets. This is after the amendment to existing rules to increase penalties for violations. Without accompanying behavioural changes, the outcomes for both insurers and those who sign up for these sophisticated motor insurance products may not be optimal.