Life insurance is growing at an overall CAGR of 10-12%, general at about 18%, and health insurance at about 40%
Next revolution will be on AI and robotics; digital, biological and physical processes will get combined
It will be 20 years next year of the insurance industry opening up to the private sector. Mint’s Insurance Conclave 2019, held on 14 May in Mumbai, debated what the last 20 years in the insurance industry have been like in terms of laying the foundation for both life and non-life insurers and what changes the industry would possibly witness in the next 20 years.
The Indian insurance industry started during the British time with only private sector participation to begin with. There was a proliferation of insurance companies then and that resulted in the formation of the Legislation Insurance Act of 1938, to regulate the sector. We then nationalised the life insurance industry in 1956, followed by nationalisation of the general insurers and then on the basis of the Malhotra Committee report, the government decided to liberalize the sector and allow private sector participation. When we allowed the private sector to participate, naturally, the issue of regulation had to be brought in and the IRDAI Act was passed.
Starting from 2000-2001, we have seen the private sector flourish and the insurance sector has grown—with more players, higher turnover, newer products, new and better distribution channels and greater visibility of the sector.
If we look back at the last 20 years, we will realise that in the first year itself, several regulations came into being, including appointing an actuary system, a prescribed minimum solvency margin, exposure and prudential norms for investment, regulations and disclosures, and reinsurance norms. In the same year, we had four private life insurance companies and three private general insurance companies.
I would broadly divide the last 18 years into three phases of six years each. Between 2000-2001 and 2005-2006, new channels of distribution came into being. Brokers entered the sector for the first time and so did corporate agents who were formerly working with banks and other financial institutions. These brokers and agents leveraged the wide network they had which resulted in enhancement of insurance penetration in the country. During the same period, we prescribed educational qualification, training requirements and examinations for sales and service personnel to ensure ethical behaviour. A code of conduct was also put in place. We also came up with a regulation for the protection of policyholders. Rural and social sector obligation also came into being during this period so as to push the insurance companies from metropolitan areas to inner lands. Then, micro insurance as a concept was developed to leverage the presence of small NGOs, self-help groups and micro-finance institutions to tap the low-income segments by selling low-premium, affordable products. Towards the fag end of this period, we also introduced the concept of stand-alone health insurance companies and we have seven such insurers today.
The next phase, between 2006-2007 and 2011-2012, saw domination of unit-linked insurance plans (Ulips). They became very popular at the beginning of this period but thereafter there was huge volatility in the market which affected their stability. By 2011-2012, the growth in this area decreased. Irdai was then compelled to come out with certain regulations to protect the policyholders. This was done by prescribing reduction in yield criteria, minimum surrender charges and enhanced disclosure norms. In the general insurance sector, the fixed tariff rule was removed which resulted in steep reduction in the premium rates due to competition. Though competition is good in a deregulated economy but it did have some negative impact—there was some erosion of pricing discipline and underwriting losses were also observed in some cases. During this period, the Insurance Information Bureau (IIB) was formed by Irdai to use data analytics for pricing and underwriting policies, and for the prevention of fraud. Irdai also insisted on mandatory public disclosure.
The next six years, between 2012-13 and 2017-18, Irdai drafted new regulations for life insurance products to address market conduct issues and to improve transparency. During this period, the Insurance Act was amended substantially. As a result, several regulations underwent changes to bring in a new framework. Foreign shareholding which was earlier fixed at 26% was raised to 49%.
New channels of distribution like web aggregators and POS (points of sale) were introduced to improve insurance penetration. Insurance repositories were brought in for maintenance and updation of policies. Foreign reinsurance branches were allowed in the country after the legislative changes and now we have 10 such branches. During the same period, six companies got listed, which improved disclosure, transparency and public scrutiny. Irdai wanted to make it compulsory for all insurance companies to get listed after a certain number of years of existence but this has not been accepted by the industry.
As we have seen, the growth in insurance sector is above the economic growth rate and I think this will continue for the next 20 years. The overall CAGR (compounded annual growth rate) in life insurance is 10-12%. General insurance is growing at about 18% and stand-alone health insurance companies are growing at about 40%. We have tremendous scope as far as health insurance is concerned. There are already 120 million policyholders through government-initiated schemes.
Reinsurance is another sector where we have the General Insurance Corp., which is now among the 10 largest reinsurers globally. With our demographic profile and high economic growth rate, the need for protection will grow.
In the next 20 years, we should also look at how the demographic profile is changing and what would the future needs be because traditional insurance products may not be useful for the millennial, Gen Y and Gen Z generations. The next revolution will be on artificial intelligence, robotics and bioinformatics; digital, biological and physical processes will all get combined together. This would require new types of products. There will be a huge need for cyber security insurance and liability insurance. Need-based insurance is something that we will have to prepare ourselves to provide to the next generations. User-based insurance or bite-sized insurance products will be designed during underwriting depending upon the quantum of usage, nature of usage and policyholder’s behaviour. This will be possible because of the huge amount of data which would be available with the insurance companies. Of course from the regulatory point of view, we will have to be quite watchful.
The use of digital technology is changing the entire landscape of how we work. There is also a sort of societal transformation and the insurance sector can exploit this to innovate products, to use it in the entire value chain—starting from underwriting to relationship management with the clients, for claim settlement, grievance redressal, pricing and feedback. I do not suggest complete digitisation because it may not work in remote areas. However, digital technology should be used to increase outreach even in the most remote areas and for disseminating information, helping distribution channels to sell products more ethically and reduce mis-selling. Face-to-face contact will also be necessary. Both digital technology and personal relationship will have to be used to sell insurance products.
We are requesting the government to allow Aadhaar-based KYC in insurance as well. Banks and telecom companies have already been allowed. Insurance and insurtech companies need to use simple KYC so they don’t spend too much time and customers do not have to wait for too long before they get the product.
We have come up with a draft regulatory sandbox mechanism and have sought views of the stakeholders. Some of the regulatory provisions may not work for innovating products and processes, and since new developments are coming up in the insurtech space, sandbox will allow them to partially relax some of the regulatory provisions for a short period of time. Regulations can be modified later, if need be.
Twenty years is too long a period to think about what is going to happen. The risks will keep changing. The biggest emerging risk now is of climate change. In the last couple of years, so many natural disasters have struck us. Insurance companies have to be prepared for such unusual risks.