LIFE INSURANCE — LESS RIGID NORMS MAY HELP: Essay

English_Master March 22, 2016 No Comments

LIFE INSURANCE — LESS RIGID NORMS MAY HELP

The insurance industry today is passing through an ex­citing phase. The lure of the growth potential has already seen players drawing up aggressive plans for market and the mind share of prospective customers. The regulator – Insurance Regulatory and Development Authority (IRDA) – played a notable role in the development of the industry. Six years of liberalization may not be a long period but it certainly has some important lessons for all concerned. An attempt is made here to highlight the growth and the potential in the life insur­ance sector, the role played by the regulator and certain is­sues that need to be addressed.

The life insurance industry in India, which had been nationalized in the 1950s, was liberalized in 1999 based on the recommendations of the Malhotra Committee report (1993). After passing of the IRDA Act 1999, the first private sector life insurance company started its business in 2001. Today there are 15 players in life and 11 in non-life in the private sector. The Indian demographic composition and the life in­surance penetration so far have enhanced the attractiveness of the sector. Demographics

  • Sixty-three per cent of the Indian population is in the age group of 15-64.
  • As per U.N. estimates, this group will constitute 68 per cent of the population by 2035.
  • Thirty-two per cent of Indians are in the age group of 0-14.
  • India has 18 per cent of the world population and con­tributes to two per cent of the world GDP.
  • According to the National Council for Applied Eco­nomic Research, households having incomes in the Rs. 2- 5 lakhs range are expected to grow by 69 per cent in 2006-10.

The share of India in global life insurance is a meager 0.66 per cent. Life Insurance penetration has gone up from 2.15 per cent (2001) to 2.53 per cent (2004), but is still low compared to the 5.84 per cent (2001) for Asian countries. Per capita premium was $15.90 in 2006 as against $125 for Asia in 2001 and $235 for the whole world. As per various esti­mates, only 20 per cent of the insurable Indian population is insured.

Companies with various channels of distribution have posted a premium growth of above 100 per cent year after year. There has been tremendous growth since liberalization of life insurance. Initial estimates have been surpassed by a wide margin. The traditional market place has been trans­formed to give way to dynamic new age professionalism in life insurance selling. A quick look at some of the liberalization highlights.

Impact of liberalization

The monopolistic character of the sector with the Life Insurance Corporation as the sole player has changed into a vibrant multiplayer competitive industry. Some more com­panies have announced their intentions to join the party and this will increase the existing number of 15 players.

Less transparent traditional products marketed mainly for tax savings have given way to innovative products. A new generation of transparent, unbundled and need based prod­ucts such as unit-linked plans have already gained popularity with customers. For some of the insurers, more than 90 per cent of the total new business comes from new generation unit linked products.

Professionalism is becoming the buzzword. Selling proc­esses are crafted to focus more on needs. The aim is to cater to various needs of life such as education, marriage provi­sions, and maximization of wealth and savings for retirement (pension). Prior to liberalization, the industry was dominated by the traditional agency model of distribution.

One of the biggest changes has been the advent of new-age distribution channels. Insurers’ quest for cost effective and yet high impact distribution of insurers has led to the emergence of channels such as Banc assurance hitherto new to India. Other channels such as corporate agency, brokers, call centers and the Internet have also been explored.

Going by the present estimates the number of agents exceeds 1.5 million. Almost all the large and small banks (with number of branches selling exceeding 30,000) have joined the distribution rally with more than 300 brokers.

Consequently, the country is witnessing growing insur­ance awareness with such new generation products making entry, even in Tier 2 and Tier 3 cities. Private insurers have already made an impressive beginning. The first year pre­mium collection (including regular as well as single) growth clearly indicates a strong upward trajectory. The performance of the top three private life insurers as of September 2006 indicates strong movement and can be the indicator of things to come.

Need for caution

While the industry is busy riding the growth wave, a note of caution deserves a place here, One should not forget that life insurance is one of the important financial instru­ments aimed at protection as well as long-term savings, Dip­ping sales of protection products and sales mix skewed in favour of unit-linked products for short-term gains are early indicators to be watched.

Another significant indicator is the share of life insurance in total savings. This has not gone up significantly in spite of growth.

Life for the life insurer is not without its share of issues and difficulties. A brief account of a select few of these is presented here. These issues are fundamental to the growth and long-term development of the industry and a proactive regulatory support holds the key.

TRAINING OF FIELDFORCE

Life insurance, being a complex and need-based prod­uct, requires a well-trained field force. This has created a huge demand and issues of support infrastructure. Regulations re­quire a mandatory 100 hours of training (classroom or online) for all those engaged in actual selling of life insurance.

Further, as per IRDA norms, the training has to be im­parted through accredited training institutions (by IRDA) and in a specific manner for 18 days. In earlier years, when insur­ers were focusing on urban areas, infrastructure in the form of approved institutions as well as other support was not a problem. Now when the focus has shifted to rural areas, ap­proved institutions are not available in adequate numbers. The online mode of 100 hours learning has its own problems of network and electricity supply.

The pattern of 100 hours has been there for the last six years; however, there is a need to study the correlation be­tween the syllabus and the resultant professional enablement. With increasing competition, the companies are keen on re­cruiting a more professionally qualified field force to differ­entiate them in the market place. Therefore, the regula­tor can perhaps confine its role to examination and certifica­tion of the field force and leave the training and grooming to companies.

Market conduct

A code of conduct is the need of the hour. The U.K., Malaysia and South Africa and many others have a code of best practices as life insurance is a business based on the twin principles of trust and risk- sharing. It is important that such a business is operated and administered with the highest de­gree of integrity and ethics. In order to boost customer and regulator confidence, the industry needs to adopt the best prac­tices including Certifications (for UL and non-UL products) and illustration based selling.

The agency model continues to be the main route for distribution of insurance in India. Though it has its strengths, there are challenges as well.

There are statutory restrictions on disbursement of com­mission. Sections 40 and 40A of the Insurance Act 1938 pre­scribe the division subject to a maximum of 60 per cent of the total premium in the prescribed initial period.

The commission structure is rigid as it defines the first year, second year and further commissions, leaving no room to maneuvers for the companies. In this competitive era, dif­ferent companies have different distribution models and dif­ferent methods of recruitment and hence require freedom to decide on the commission structure.

Another important point to be noted here is that com­missions are a means to achieve certain business objectives. For example, the maximum commission that can be paid on a single premium is 2 per cent. It does not differentiate whether it is a protection plan or a savings plan and protection pre­mium is low in comparison to a savings plan premium. Pro­tection products are the preferred ones but the commission structure does not remunerate the agents enough to promote such products.

The provisions should be amended suitably to ensure a pattern of distribution that incentivizes persistency and after sales service. Insurers should be given more autonomy to decide the commission mix.

Expenses management

Section 40 B of the Insurance Act provides that no in­surer shall in respect of life insurance business transacted by him in India, spend as expenses of management in excess of the prescribed limits. Such expenses include all commission payments and capitalized expenses. The Insurance rules fur­ther lay down the manner of computation of the prescribed limits.

Costs associated with infrastructure, training and human resource management have been increasing constantly. Also, considering the diversity in the profile of the products, pre­scribing measurements like renewal expense ratio will be an arbitrary exercise. No other country seems to have such pro­visions.

The present provisions (crafted in 1938) are not in tune with the current market environment. They were introduced at a time when the capital requirement norm was not in place and valuations were done once in five years as opposed to the current practice of annual valuation.

Also, all relevant information for taking corrective meas­ures is available through these valuation reports. However, to avoid runaway spending by insurers due to competitive pres­sures, the regulator can think of bringing in more disclosures.

Solvency margins

Solvency margin (Sections 64 V and 64 VA of the In­surance Act 1938) refers to the mechanism that provides for the periodic, forward-looking analysis of an insurer’s ability to meet his obligations under various conditions. It involves the matching of assets and liabilities. Accordingly, a certain level of balance has to be maintained between the insurer’s assets and liabilities. The IRDA through its guidelines requires life insurers to maintain a 150 per cent solvency margin – 50 per cent extra cushion over and above the norms stipulated in the regulations.

The present guidelines are highly prescriptive in nature. They do not differentiate between companies and their abili­ties to undertake and manage different types of risk. This “one size fits all” approach creates considerable strain on the com­panies and their capital.

There is a need for review of the solvency margin regu­lations taking into consideration (a) the factors used in sol­vency calculations (b) statutory reserve and solvency require­ments and (c) the factors to give credit to a company’s size and risk management policies. Based on the study of busi­ness models from other countries like the U.S., the authori­ties need to look at “the risk based capital approach” that is gaining momentum in the banking sector as well.

Investment guidelines

The investible funds of life insurance companies are subjected to stringent provisions laid down by Sections 27, 27A, 27B, 27C and 27D of the Insurance Act 1938 (as amended over the years). The main objective has been to regu­late investments in the interest of policyholders who entrust their savings.

These provisions detail the asset classes and the pro­portion that can be invested in each – for example, a mini­mum of 25 per cent in government securities. It prescribes further guidelines with respect to certain asset classes such as equity and debentures. Section 27C prohibits investments of funds outside of India.

While the spirit of the provisions is to be endorsed, there is a need to take a relook as suggested by the Narasimham Committee (2005). Such micro regulation not only restricts investment management freedom but has also an impact on returns to policyholders. Insurers use diversification as one of the important tools.

They should have access to a broader basket including asset classes like derivatives. Also, they should be allowed to invest abroad. Such freedom helps diversify investment risks thereby benefiting policyholders.

Life insurance, as mentioned above, is a capital-intensive business. Emphasis is on technology (for superior service) coupled with product innovation.

There is evidence that foreign direct investment in life insurance even up to a limited extent of 26 per cent has re­sulted in some definite gains for the industry.

The cap for FDI has to be raised to 49 per cent. This will give an impetus to overall development of the sector with customers as the ultimate beneficiaries.

Liberalization has led to a new distribution channel Banc assurance – a concept that is already rooted firmly in European countries. In a short span it has made a mark in India by offering competitive advantages in costs and distri­butional efficiencies.

However, at present it is treated on a par with other cor­porate agencies with no separate provision. It deserves dif­ferential treatment and a facilitative mechanism with respect to commission and licensing. It is the channel of the future and needs to be promoted vigorously.

The road ahead

Life insurance is poised for substantial growth in the times to corne. The current focus of insurers has been the acquisition of new business and market share. The real chal­lenge is to retain and service these customers.

LIFE INSURANCE — LESS RIGID NORMS MAY HELP

The insurance industry today is passing through an ex­citing phase. The lure of the growth potential has already seen players drawing up aggressive plans for market and the mind share of prospective customers. The regulator – Insurance Regulatory and Development Authority (IRDA) – played a notable role in the development of the industry. Six years of liberalization may not be a long period but it certainly has some important lessons for all concerned. An attempt is made here to highlight the growth and the potential in the life insur­ance sector, the role played by the regulator and certain is­sues that need to be addressed.

The life insurance industry in India, which had been nationalized in the 1950s, was liberalized in 1999 based on the recommendations of the Malhotra Committee report (1993). After passing of the IRDA Act 1999, the first private sector life insurance company started its business in 2001. Today there are 15 players in life and 11 in non-life in the private sector. The Indian demographic composition and the life in­surance penetration so far have enhanced the attractiveness of the sector. Demographics

  • Sixty-three per cent of the Indian population is in the age group of 15-64.
  • As per U.N. estimates, this group will constitute 68 per cent of the population by 2035.
  • Thirty-two per cent of Indians are in the age group of 0-14.
  • India has 18 per cent of the world population and con­tributes to two per cent of the world GDP.
  • According to the National Council for Applied Eco­nomic Research, households having incomes in the Rs. 2- 5 lakhs range are expected to grow by 69 per cent in 2006-10.

The share of India in global life insurance is a meager 0.66 per cent. Life Insurance penetration has gone up from 2.15 per cent (2001) to 2.53 per cent (2004), but is still low compared to the 5.84 per cent (2001) for Asian countries. Per capita premium was $15.90 in 2006 as against $125 for Asia in 2001 and $235 for the whole world. As per various esti­mates, only 20 per cent of the insurable Indian population is insured.

Companies with various channels of distribution have posted a premium growth of above 100 per cent year after year. There has been tremendous growth since liberalization of life insurance. Initial estimates have been surpassed by a wide margin. The traditional market place has been trans­formed to give way to dynamic new age professionalism in life insurance selling. A quick look at some of the liberalization highlights.

Impact of liberalization

The monopolistic character of the sector with the Life Insurance Corporation as the sole player has changed into a vibrant multiplayer competitive industry. Some more com­panies have announced their intentions to join the party and this will increase the existing number of 15 players.

Less transparent traditional products marketed mainly for tax savings have given way to innovative products. A new generation of transparent, unbundled and need based prod­ucts such as unit-linked plans have already gained popularity with customers. For some of the insurers, more than 90 per cent of the total new business comes from new generation unit linked products.

Professionalism is becoming the buzzword. Selling proc­esses are crafted to focus more on needs. The aim is to cater to various needs of life such as education, marriage provi­sions, and maximization of wealth and savings for retirement (pension). Prior to liberalization, the industry was dominated by the traditional agency model of distribution.

One of the biggest changes has been the advent of new-age distribution channels. Insurers’ quest for cost effective and yet high impact distribution of insurers has led to the emergence of channels such as Banc assurance hitherto new to India. Other channels such as corporate agency, brokers, call centers and the Internet have also been explored.

Going by the present estimates the number of agents exceeds 1.5 million. Almost all the large and small banks (with number of branches selling exceeding 30,000) have joined the distribution rally with more than 300 brokers.

Consequently, the country is witnessing growing insur­ance awareness with such new generation products making entry, even in Tier 2 and Tier 3 cities. Private insurers have already made an impressive beginning. The first year pre­mium collection (including regular as well as single) growth clearly indicates a strong upward trajectory. The performance of the top three private life insurers as of September 2006 indicates strong movement and can be the indicator of things to come.

Need for caution

While the industry is busy riding the growth wave, a note of caution deserves a place here, One should not forget that life insurance is one of the important financial instru­ments aimed at protection as well as long-term savings, Dip­ping sales of protection products and sales mix skewed in favour of unit-linked products for short-term gains are early indicators to be watched.

Another significant indicator is the share of life insurance in total savings. This has not gone up significantly in spite of growth.

Life for the life insurer is not without its share of issues and difficulties. A brief account of a select few of these is presented here. These issues are fundamental to the growth and long-term development of the industry and a proactive regulatory support holds the key.

TRAINING OF FIELDFORCE

Life insurance, being a complex and need-based prod­uct, requires a well-trained field force. This has created a huge demand and issues of support infrastructure. Regulations re­quire a mandatory 100 hours of training (classroom or online) for all those engaged in actual selling of life insurance.

Further, as per IRDA norms, the training has to be im­parted through accredited training institutions (by IRDA) and in a specific manner for 18 days. In earlier years, when insur­ers were focusing on urban areas, infrastructure in the form of approved institutions as well as other support was not a problem. Now when the focus has shifted to rural areas, ap­proved institutions are not available in adequate numbers. The online mode of 100 hours learning has its own problems of network and electricity supply.

The pattern of 100 hours has been there for the last six years; however, there is a need to study the correlation be­tween the syllabus and the resultant professional enablement. With increasing competition, the companies are keen on re­cruiting a more professionally qualified field force to differ­entiate them in the market place. Therefore, the regula­tor can perhaps confine its role to examination and certifica­tion of the field force and leave the training and grooming to companies.

Market conduct

A code of conduct is the need of the hour. The U.K., Malaysia and South Africa and many others have a code of best practices as life insurance is a business based on the twin principles of trust and risk- sharing. It is important that such a business is operated and administered with the highest de­gree of integrity and ethics. In order to boost customer and regulator confidence, the industry needs to adopt the best prac­tices including Certifications (for UL and non-UL products) and illustration based selling.

The agency model continues to be the main route for distribution of insurance in India. Though it has its strengths, there are challenges as well.

There are statutory restrictions on disbursement of com­mission. Sections 40 and 40A of the Insurance Act 1938 pre­scribe the division subject to a maximum of 60 per cent of the total premium in the prescribed initial period.

The commission structure is rigid as it defines the first year, second year and further commissions, leaving no room to maneuvers for the companies. In this competitive era, dif­ferent companies have different distribution models and dif­ferent methods of recruitment and hence require freedom to decide on the commission structure.

Another important point to be noted here is that com­missions are a means to achieve certain business objectives. For example, the maximum commission that can be paid on a single premium is 2 per cent. It does not differentiate whether it is a protection plan or a savings plan and protection pre­mium is low in comparison to a savings plan premium. Pro­tection products are the preferred ones but the commission structure does not remunerate the agents enough to promote such products.

The provisions should be amended suitably to ensure a pattern of distribution that incentivizes persistency and after sales service. Insurers should be given more autonomy to decide the commission mix.

Expenses management

Section 40 B of the Insurance Act provides that no in­surer shall in respect of life insurance business transacted by him in India, spend as expenses of management in excess of the prescribed limits. Such expenses include all commission payments and capitalized expenses. The Insurance rules fur­ther lay down the manner of computation of the prescribed limits.

Costs associated with infrastructure, training and human resource management have been increasing constantly. Also, considering the diversity in the profile of the products, pre­scribing measurements like renewal expense ratio will be an arbitrary exercise. No other country seems to have such pro­visions.

The present provisions (crafted in 1938) are not in tune with the current market environment. They were introduced at a time when the capital requirement norm was not in place and valuations were done once in five years as opposed to the current practice of annual valuation.

Also, all relevant information for taking corrective meas­ures is available through these valuation reports. However, to avoid runaway spending by insurers due to competitive pres­sures, the regulator can think of bringing in more disclosures.

Solvency margins

Solvency margin (Sections 64 V and 64 VA of the In­surance Act 1938) refers to the mechanism that provides for the periodic, forward-looking analysis of an insurer’s ability to meet his obligations under various conditions. It involves the matching of assets and liabilities. Accordingly, a certain level of balance has to be maintained between the insurer’s assets and liabilities. The IRDA through its guidelines requires life insurers to maintain a 150 per cent solvency margin – 50 per cent extra cushion over and above the norms stipulated in the regulations.

The present guidelines are highly prescriptive in nature. They do not differentiate between companies and their abili­ties to undertake and manage different types of risk. This “one size fits all” approach creates considerable strain on the com­panies and their capital.

There is a need for review of the solvency margin regu­lations taking into consideration (a) the factors used in sol­vency calculations (b) statutory reserve and solvency require­ments and (c) the factors to give credit to a company’s size and risk management policies. Based on the study of busi­ness models from other countries like the U.S., the authori­ties need to look at “the risk based capital approach” that is gaining momentum in the banking sector as well.

Investment guidelines

The investible funds of life insurance companies are subjected to stringent provisions laid down by Sections 27, 27A, 27B, 27C and 27D of the Insurance Act 1938 (as amended over the years). The main objective has been to regu­late investments in the interest of policyholders who entrust their savings.

These provisions detail the asset classes and the pro­portion that can be invested in each – for example, a mini­mum of 25 per cent in government securities. It prescribes further guidelines with respect to certain asset classes such as equity and debentures. Section 27C prohibits investments of funds outside of India.

While the spirit of the provisions is to be endorsed, there is a need to take a relook as suggested by the Narasimham Committee (2005). Such micro regulation not only restricts investment management freedom but has also an impact on returns to policyholders. Insurers use diversification as one of the important tools.

They should have access to a broader basket including asset classes like derivatives. Also, they should be allowed to invest abroad. Such freedom helps diversify investment risks thereby benefiting policyholders.

Life insurance, as mentioned above, is a capital-intensive business. Emphasis is on technology (for superior service) coupled with product innovation.

There is evidence that foreign direct investment in life insurance even up to a limited extent of 26 per cent has re­sulted in some definite gains for the industry.

The cap for FDI has to be raised to 49 per cent. This will give an impetus to overall development of the sector with customers as the ultimate beneficiaries.

Liberalization has led to a new distribution channel Banc assurance – a concept that is already rooted firmly in European countries. In a short span it has made a mark in India by offering competitive advantages in costs and distri­butional efficiencies.

However, at present it is treated on a par with other cor­porate agencies with no separate provision. It deserves dif­ferential treatment and a facilitative mechanism with respect to commission and licensing. It is the channel of the future and needs to be promoted vigorously.

The road ahead

Life insurance is poised for substantial growth in the times to corne. The current focus of insurers has been the acquisition of new business and market share. The real chal­lenge is to retain and service these customers.