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In November 2020, Harsh Shukla, 29, an IT professional based in Greater Noida, had to make a quick decision. Covid-19 had jolted him into action, and he was scouting for a “good health insurance plan". Unfortunately, insurance is a notoriously complicated subject in India with dozens of different plans and top-ups, and Shukla didn’t know how to make sense of any of it.

Luckily, the Insurance Regulatory and Development Authority of India (Irdai) had issued a set of guidelines a few months earlier (in January 2020, just prior to the onslaught of covid), which was supposed to make things easier for consumers like Shukla. The new rules were supposed to create a “standard" product with a common name—making it easy for consumers to identify it—followed by the name of the insurance provider. Over 40 commonly used insurance terms and conditions were meant to be standardized across providers, liability had to be spelt out clearly and an informed consumer choice was supposed to reign supreme. The deadline for effecting these changes: 1 April 2020 (well in time for the covid-induced insurance demand spurt).

However, these lofty ambitions didn’t make a material difference when Shukla was in the market for a good product. The first issue facing Shukla was that a standardized health policy was not available across all insurers. He also quickly realized that the standard product, even when available, offered rather limited coverage.

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Weak wicket

“I didn’t understand the co-pay clause or the basis for the pricing difference (why insurers put different price tags while offering the same product)," Shukla said. “I also didn’t quite understand how (available) standardized insurance policies score over comprehensive health policies."

Strangely, guidelines that were meant to provide more transparency and clarity in theory had the exact opposite effect in practice. Eventually, Shukla ended up buying a comprehensive health policy from a leading insurance firm rather than opting for a standard health policy.

This chasm between the stated goal and the actual experience of consumers matters for one simple reason: The pandemic has changed the landscape of India’s insurance industry. Insurance penetration is expected to shoot up rapidly, with the pandemic providing a tailwind for health, life and other insurance products. Until 2020, insurance used to be a “push product", primarily promoted by an army of agents and banks. It is now progressively transforming into a “pull product", with consumers raising the first query. Many of these new entrants to the insurance market will greatly benefit if a standardized product market functions effectively.

Whether the experience of these new entrants is good or bad matters because a wider insurance penetration will bring down costs for everyone. As of FY20, India’s insurance penetration is a mere 3.76% (life insurance products at 2.82% and non-life penetration at 0.94%), according to the India Brand Equity Foundation (IBEF), a website established by the Union government’s ministry of commerce and industry.

For an industry that is used to a modest growth of roughly 3-5% year-on-year, this is a clear inflection point. Standardization can potentially facilitate further growth. But will it work for India’s consumers, many of whom are suddenly clamouring for a rainy-day cover?

Need for standardization

What exactly is a standard cover? It effectively means the regulator—Irdai, in this case—will impose a framework in terms of the specific coverage and the details of the product. Within the guardrails of this framework, insurers can offer their own individual plans. The only differentiator will be the price, which could have the added advantage of keeping consumer costs low since insurance providers won’t be able to hide behind small differences in benefits to jack up the premium.

Any major difference in price could then be justified only by offering a markedly superior customer service experience. Thus, it is a potential win-win for ordinary consumers.

Assuming all the features (across providers) are the same, customers will have to make a judgment based on just a few verifiable parameters, said Nishith Baldevdas, founder of Shree Financial, an investment advisor registered with the Securities and Exchange Board of India (Sebi). “The basic criteria to keep in mind while shortlisting would be affordability (upfront price), promptness of service, the number of claims settled in the last 5 years and whether the claims settlement record is good."

The push towards standardization could also benefit insurance providers. Currently, policyholders often get into extended arguments with firms during the claims settlement process due to ambiguity in the terms and conditions. Standardization of the product could play a crucial role in reducing recurrent disagreements. A standardized product will reduce the complexity of the claims process. But the key advantage is this: products that bring in more transparency will increase consumer confidence and build trust in the industry by simplifying price points and associated underwritings.

Trust is an essential lubricant for any well-functioning marketplace. Informed buyer choice is one of the key bottlenecks in the Indian insurance ecosystem currently. Due to the vast array of policies that are on offer in the market, consumers often end up getting confused. For anyone with a day job and dozens of other priorities, buying the right insurance may not be an easy task. In most cases, insurance firms and their distribution agents are responsible for explaining the specific details of a product.

If this interaction is fair and transparent, it inevitably builds trust. For a first-time policy buyer, the first go-to person is generally the insurer. And a well-designed standardized product will make it very easy for a newcomer to glean the right information from a firm or an agent.

Imperfect transition

The year 2020 brought about a complete revolution for the health insurance industry. While the first steps towards greater simplification and standardization were taken, the regulator’s quest for clarity often created a set of new confusions.

For instance, after the introduction of the standard Arogya Sanjeevani health policy, the regulator modified the product several times in order to attract insurers and buyers. This eventually caused more confusion, said an industry expert who requested anonymity. Thus, while the amendments may have been intended to benefit policyholders and buyers, too many modifications over the past year increased the complexity unnecessarily.

In the realm of life insurance, a significant regulatory intervention was the introduction of a standard term insurance product—Saral Jeevan Bima—by Irdai in October 2020. The policy came into effect on 1 January 2021.

Generally, term life insurance policies cover almost all kinds of death and have no exclusions (except a clause on suicide in the first year after a policy is purchased). The product has thus become highly commoditized, and insurers generally struggle to bring out any real differentiation. Interestingly, however, a few insurers are currently selling the Saral Jeevan Bima policy at nearly twice the regular term insurance policy price.

Insurance firms often use filters such as income, education level, and the demography of the buyer in order to evaluate term insurance products, said the industry expert mentioned earlier. “The problem with a standard term insurance like Saral Jeevan Bima is that there are no filters permitted… meaning that the premium will be high as the risk is high," he explained.

Essentially, a person who earns reasonably well and lives in a city that is not hazardous may not find the standard insurance product relevant since the regular term product will be cheaper for them.

Insurer resistance

Despite the hiccups, the benefits of standardizing India’s complex insurance web are many. Yet, insurers are still reticent about marketing these policies.

“Generally, the insurance companies have a lower inclination towards these standardized products as these products have a lower premium and a higher comparison rate," said Naval Goel, founder and chief executive officer of PolicyX.com. “Further, this has also led to more competitive pressure on insurance companies to offer the best after-sale services at relatively lower prices than other insurers. Therefore, the lesser profitability somewhere demotivates the insurers in marketing new standardized products."

However, there could also be some genuine reasons as to why insurance firms are holding back, Goel said. “The Irdai can take some steps to help insurers in sorting out those issues that are causing delays. It is difficult to predict whether Irdai will do this," he added.

Echoing similar views, Srinath Mukherjee, co-founder and director, SANA Insure, said that insurers are not promoting these standard products because they do not want to compete only on price. Standardization brings in the fear of being treated as a commodity in their minds, said Mukherjee. “Insurers are, therefore, just complying with the regulator while launching these (new) products, but (they are) not promoting them in any way. Their human agents and intermediaries also don’t like to sell these products because of (the) lower premiums and commissions."

Besides, India’s problem of low insurance penetration is due to multiple factors—lack of trust, complexity of products, and the lack of distribution reach of mainline insurance firms. Standardization of insurance products currently focuses on only one of these underlying concerns—the easing of complexity. Some of the other issues still remain unaddressed.

Mukherjee says that some of the standardized products that have been cleared by the regulator could actually put off a segment of value-seeking consumers. The regulator has defined a co-pay clause, which does not go well with the Indian mindset, Mukerjee said. “For instance, if I am paying a premium of say 5,000 for a sum insured of 10 lakh, and the hospitalization expenses amount to 3 lakh… at 5% co-pay, I will be forced to pay another 15,000 out of my pocket. Such conditions reinforce the lack of trust, and so customers are still staying away (from such types of standardized policies)."

Hence, the only way to increase insurance penetration is via trustworthy, transparent and comprehensive digital platforms, said Mukherjee.

Things will inevitably improve as the new guidelines fall into place and insurers learn to adapt to the new system, said Chandan D.S. Dang, executive director at SecureNow, an insurance broker. “Insurers are beginning to understand the claim incidence rates (proportion of buyers who file claims) since these products are now in the market. This process will help them in establishing the correct prices. Do keep in mind that the incidence of covid-19 itself has been unpredictable so far," he said.

While it may indeed be a little early to gauge the success or failure of this new class of standardized insurance products—ranging from Arogya Sanjeevani and Corona Kavach to Saral Jeevan Bima—all eyes are clearly on them. “In the long run, I think this practice of standardizing insurance products will prove to be helpful," said PolicyX.com’s Goel.

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